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Debt Consolidation Vs Debt Management

debt consolidation Vs debt management

Personal finance is possibly one of the most complex and tough to navigate among the aspects that we deal with daily. Quite honestly – it becomes even more overwhelming when we find ourselves stuck in the vortex of debt. The good news, however, is there are several strategies to help people regain control over finances. Two of the most common strategies are debt consolidation and debt management. Even though their approaches and consequences vary, both alleviate the burden of debt and help to simplify repayment. This guide delves into the intricacies and aspects of both strategies – their differences, benefits, disadvantages, efficacy, and their suitability for a range of financial circumstances.

What is Debt Consolidation?

It is a strategy in the financial realm that focuses on bringing multiple debt payments under one single payment plan. A variety of debts such as personal loans, medical bills, and credit card due payments can be ‘consolidated’ into one. This helps to streamline repayment, while possibly lowering interest rates.

How Does It Work?

This is achieved by getting a new loan which will pay off all the existing debt and thus result in one single EMI payment. Consolidation can be achieved through various methods, including consolidation loans, balance transfer credit cards, and home equity loans or lines of credit (HELOCs). In credit card balance transfers, an individual can transfer their high-interest credit card balances to a card having a zero or lower annual percentage rate (APR). Home equity loans or HELOCs utilize the equity in a home to secure a loan for consolidation purposes.

Pros and Cons

Pros

1. Simplified and Single Repayment – This reduces the risk of missing payments and promotes better financial organisation and budgeting since all debts are consolidated into one payment.

2. Potential Interest Rate Reduction – It may lead to lower interest rates, resulting in savings on interest costs throughout the debt

Cons

1. Risk of Secured Debt – Home equity loans are a kind of consolidation method. However, it involves putting assets at risk if one defaults on payments

2. Eligibility Criteria – If you are struggling with debt, the issues of low or unstable income and a poor credit score are likely already present. Hence, qualifying for consolidation options could limit accessibility for some individuals

3. Does Not Correct Spending Habits – This strategy is not the solution for poor spending habits. A single payment could potentially tempt the individual to top up a loan/or start another, leading to increased debt

Lesser-Known Facts

Consolidation isn’t just for credit cards

While the focus of this strategy could be credit card debt, borrowers must understand that student loans, medical bills, and personal loans can also fall under debt consolidation. This adds to the versatility of this strategy and can be used by borrowers facing various debt challenges.

Better Credit Usage

It has the potential to improve the ratios of credit usage. A single loan account could lower the credit utilization ratio, which in turn could potentially have a positive impact on one’s credit score.

What is Debt Management?

Debt management is the process of working with a debt solution company that can
devise and execute a structured repayment plan. Such a company works with the debtor to reduce financial stress by negotiating with creditors to secure lower interest rates or payment terms. They also help to make debt repayment more manageable for the borrower.

How Does Debt Management Work?

A debt management company would make a thorough and comprehensive assessment of the financial ‘health’ of the borrower. This would include understanding the income, expenses, and total debt amounts. Once a plan is established by the debt management company and the borrower, the company would then negotiate terms with the creditor/s. Post the agreement of the terms, the borrower would make one monthly payment to the company, which then further disburses the funds to the creditors based on the terms negotiated.

Types of Debt Management Schemes

Debt Management Companies – Professional and experienced companies offering financial education and counseling services to individuals struggling with debt

Debt Management Plans – Formal agreements, that debt management companies prepare, between borrowers and creditors that negotiate better rates and put down a structured repayment plan

Debt Settlement Programs – A negotiated lump sum amount (lower than the actual debt owed) that the borrower can pay to the creditor, and close the debt account for good.

Pros and Cons of Debt Management

Pros

1. Professional Assistance – Debt management companies/experts who offer advice and support the borrower until the loan is repaid. This proves comforting and invaluable to the borrower undergoing financial duress and stress.

2. Structured Repayment Plan – A debt management plan is a clear and transparent roadmap for debt repayment. It also ensures that the borrower remains accountable and clarifies what is due during the month.

3. Possibility of Debt Reduction – Some debt management schemes help to negotiate with creditors, to reduce the total amount owed. This in turn provides tangible savings for borrowers, which helps to alleviate some of the financial stress

Cons

1. Effect on Credit Score – The accounts enrolled in the program are shut down by creditors, this affects the individual’s credit utilization ratio and the length of the credit history, which is applied in the credit scoring model. Furthermore, the credit score may decrease if the person misses the payments while transitioning to the program or fails to adhere to the repayment plan that is agreed upon.

2. Lengthy Repayment Periods – The tenure of repayment is usually increased in a debt management plan.

3. Potential Fees and Costs – Most debt management companies would charge fees for their services – this is an additional cost for the borrower in terms of debt repayment.

Lesser-Known Facts

Fee Waivers in Some Debt Management Plans

Debt management companies/consultants negotiate lower interest rates and better credit terms, they could also waive off fees of some part of their services. This is to make debt management more accessible and affordable for those already in financial stress. Always check with your debt management company/advisor about these waivers and compare.

Alternative Repayment Strategies

Some debt management companies offer tailor-made repayment strategies to suit the debtor. These could include lump sum debt settlements with reduced payoff amounts, and paying off debts in a specific order that elevates effectiveness and ensures added savings.

Key Differences Between These Strategies

➢ Objective

Debt Consolidation

This focuses on bringing together multiple debts into a single payment. The aim is to ensure easier management and potentially lower interest rates.

Debt Management

This aims to get better credit terms and to secure favorable repayment terms. It also focuses on creating a structured debt repayment plan along with long-term financial stability.

➢ Approach

Debt Consolidation

This strategy ‘consolidates’ several debts into one single payment – various loans and transfer of balance of credit cards.

Debt Management

Creating a structured repayment plan with better terms from the creditor. This is done with the help of debt management companies/advisors.

➢ Effect on Credit Score

Debt Consolidation

There could be long-term favourable benefits if managed well, even though initially there could be a temporary negative impact on the credit score of the borrower .

Debt Management

At first, the credit score may drop due to account closures, but it can improve with regular payments over time.

➢ Who Should Opt?

Debt Consolidation

Suitable for those with moderate debt and solid credit scores looking for easier repayment options.

Debt Management

Best for people facing high-interest debts who need expert help and support.

Considerations for Choosing Either of The Strategies

Financial Situation

➢ Total Debt Amount – Assess total debt across accounts to find the best approach

➢ Credit Score – Think about how your credit score affects your ability to get help from debt consolidation or debt management

➢ Income Stability – Check if your income is steady enough to afford repayment plans without financial stress

Goals and Objectives

➢ Simplifying Repayment – Assess and determine whether simplifying repayment through consolidation would work better than a structured plan with management
➢ Lowering Interest Rates – Think about how consolidation or talking to creditors via a debt management company, could lower your interest rates

Conclusion

To sum up, debt management and consolidation are helpful options for people who are trying to reduce their excessive debt loads and getting out of debt trap. Although both strategies have advantages and disadvantages, it is crucial to comprehend their subtle differences to make well-informed selections aligned with individual financial objectives. A better financial future and enhanced financial well-being are made possible by adopting proactive measures toward debt repayment, regardless of whether one chooses debt management or debt consolidation. To embark on your journey towards financial freedom, connect with SingleDebt today. Our team is here to provide personalized assistance and guidance tailored to your unique circumstances. Take the first step towards a brighter financial future by reaching out to us for a free consultation, now.