Is Debt Consolidation Better Than a Debt Management Program?
Debt can be crippling and is a grave concern for millions of Canadians. To make matters worse, there are many misconceptions about what you need to do to tackle that debt.
We’ve put together this guide on the difference between the two most popular ways people tackle their debt: consolidation loans and management programs.
Debt consolidation loans and debt management programs are two sides of the same coin. Both options allow you to reduce debt by combining your monthly payments into one, and both options help you pay less interest.
A home equity loan can help you repay your debts and get rid of skyrocketing interest rates that are blurring your financial stability. To know more, visit this page.
Everything to Know About Debt Consolidation
Debt consolidation loans help you combine your debts into one monthly payment. This can help you get out of debt faster. However, it’s important to note that these loans are not free money—they’re still loans with interest rates attached.
When you opt for a secured debt consolidation loan, such as a home equity loan, lenders may offer an interest rate that’s less than what you are currently paying. This can save you a lot of money on interest over time, especially if you have several high-interest credit cards or loans that you have been paying off for years.
A debt consolidation loan will also lower your monthly payment because they only charge interest on the amount that remains in your account every month, so if you make a big payment early in the month, your interest rate won’t be as high as it would be otherwise.
It can be helpful for people who have taken out more loans than they can handle as it allows them to manage all of their debt in one place, rather than many.
Pros of Debt Consolidation
- The biggest pro to consolidating your debt is getting rid of all those high-interest rates. When you consolidate your debt, you pay off all those different debts with one monthly payment at a much lower interest rate. That means a greater portion of your monthly payment goes toward paying off the actual debt instead of paying interest.
- Another pro to debt consolidation is organization. With one loan, there’s usually just one due date per month, so it makes budgeting and paying bills a little easier than juggling multiple payments throughout the month.
Cons of Debt Consolidation
- Debt consolidation can hurt your credit score initially because when you secure a new loan, your credit score can go down temporarily until you make regular payments on that loan.
- Your loan may have a longer term than some of your current loans, meaning it could take more time to pay off. However, once your finances start stabilizing, you might have the option to foreclose the loan.
How Does Debt Management Work?
A debt management program works differently. Rather than offering a lower interest rate for the life of the loan or credit card, debt management companies negotiate with lenders to reduce or eliminate the principal amount owed every month.
A debt management plan can help simplify repayment and lower payments by negotiating with your creditors and creating a plan for when and how much money needs to be paid each month to whittle down your debt.
Here is how a professional debt management service works:
- You connect with a professional financial consultancy to understand and receive a free debt and budget evaluation.
- After reviewing your debts, income condition, expenses, credit score, and budget, the professional debt manager will help you determine if a debt management plan is suitable or applicable for your unique financial condition.
- If you’re suitable and eligible, your counsellor prepares a monthly payment plan that you can afford.
- Then the debt management team reaches out to your creditors and collaborates with them to minimize or eliminate the high-interest rates applicable on your outstanding loan amount.
- Once all your creditors and the debt management team agree on a suitable rate/repayment amount, your repayment plan will get initiated.
- You then make monthly payments on the agreed terms to your creditors either directly or through the dent management company.
- As each loan gets completely paid off, the account is closed and on complete repayment of all debts, your program concludes.
The biggest drawback is that you should have a strong will to avoid using a credit card again to repay these loans and close the program at the earliest.
Difference Between Debt Consolidation and Debt Management Program
A debt consolidation loan will lower your monthly payment because lenders offer smaller interest rates, while a debt management program will lower your monthly payment because it reduces the value of principal to be paid every month.
In many situations, these two options can help you feel less stressed about the bills that come each month. They both offer the chance to get out of debt faster by simplifying your monthly payments.
Knowing the difference between these two crucial concepts will help you decide which option is best for your situation.
1. Parties you deal with
- Management plans are often set up through credit counselling agencies that help negotiate with creditors on your behalf and establish a repayment plan.
- Debt consolidation is undertaken by an individual themselves. A professional mortgage broker can help you connect with creditors.
2. Manner of execution
- A debt consolidation loan “consolidates” several debts into one new loan with a lower interest rate and lower monthly payment. You use the money from this new loan to pay back your existing balances.
- With a debt management program, you make one monthly payment to your credit counselling agency. The agency then distributes this payment among your creditors, ensuring they all receive their correct amounts on time each month. A debt management plan can only be utilized for unsecured debts (credit cards, medical bills, personal loans).
While you can get a debt consolidation loan from your bank, private creditors, mortgage agencies or credit union, the most important thing when deciding on either option is your overall financial situation.
Debt consolidation through a bank or other financial institution shifts debt around with lower interest rates. And if you’re still struggling with debt, consolidation might not help you.
Hence, in such a case, a debt management plan can be your best bet. You can even choose both options, debt management being a failsafe plan. So think wisely! Go for a professional consultation if necessary.