The Difference Between Debt Consolidation and Debt Management
Debt consolidation and debt management are two popular methods of dealing with debt problems. Although they are often mentioned in the same breath, they are very different to each other both in what they try to do, and what the effects are.
Before you embark on either, it's vital to know what is entailed, and below we set out the main features of each.
Debt Consolidation
This doesn't clear debt, it simply wraps all your existing debt up into one neat bundle, with either a lower interest rate, cheaper repayments, or ideally both. It is done by taking out a new loan large enough to pay off all your existing debts, and then closing all the repaid accounts so that they can't be reused.
The idea is to replace several expensive debts with one bigger, cheaper debt, making it easier to keep up with repayments. There are three main disadvantages.
Firstly, replacing debt with debt isn't necessarily a step forward, especially if you don't close off all your old credit lines to remove the temptation of spending on them again.
Also, even though your monthly repayments might be lower, spreading your debt over a longer term may well mean that you're paying more interest overall.
Finally, in today's climate credit is getting harder and harder to come by, meaning that consolidation might not be an option at all.
Debt Management
This is a way of renegotiating your debt repayments to make them more affordable. It is usually done through a debt management agency or debt charity, and involves contacting your creditors and explaining that you are unable to keep up with your repayments at their current level, and trying to come to a new arrangement.
You then make one monthly payment to the management agency who will then distribute it to the creditors according to the new agreements made.
The advantage is that your repayments will be more affordable, and the stress of dealing with your creditors is gone.
The major disadvantages are that your credit rating will be severely damaged as you'll be breaking the terms of all your credit agreements, and also some agencies charge a hefty fee for their services.
Which to Choose?
Debt management is the more drastic course of action and is only suitable for those with severe debt problems, and is in most cases the last resort before opting for some sort of insolvency such as an IVA or even bankruptcy. As such, consolidation should be the preferred option if you truly can't keep up your repayments at their current rates, and can arrange a consolidation loan at an interest rate you can afford.
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