Debt consolidation and debt management are two debt relief options that are often confused for one another. While debt consolidation and debt management are similar financial terms, they are are not exactly the same. So, with that said, let’s break down debt consolidation vs. debt management.
Debt Consolidation vs. Debt Management
What is Debt Consolidation?
Despite how confusing a lot of financial jargon can be, debt consolidation is actually pretty simple to understand. Debt consolidation is essentially the act or process of joining a number of debts together into one.
Most commonly, when you hear the term debt consolidation, it is referring to debt consolidation loans. With debt consolidation loans, consumers borrow additional money in the form of a loan to pay off the rest of their debts. Usually debt consolidation loans come from a home equity loan, credit line, or personal loan. While this option seems great at first, be cautious to note the interest rates and the length of repayment of your deal before taking out any loan. Often times, a credit counseling agency can offer lower rates due to their relationships with lenders.
So, with that said, how does debt consolidation relate to debt management?
What is a Debt Management Program?
With debt management programs, you can consolidate bills without borrowing more money. In other words, you do not take out an additional loan to pay for your existing debts. When you enroll in a debt management program, a credit counselor at a non-profit credit counseling agency, like ACCC, will negotiate with your creditors to reduce interest rates, any outstanding late fees, and any over-limit fees. And they do this without you having to borrow more money. This option can have the effect of reducing your total monthly payments as well as the time it takes to pay off debts. Debt management programs also help you develop a budget to repay your debts within your financial means. Plus, they do so by working with your creditors to set up the plan.
How are Debt Consolidation vs. Debt Management related?
You’ve probably noticed that debt consolidation vs. debt management sounds an awful lot alike. This is because, when you enter a debt management program, part of that program is helping you consolidate your unsecured debts. Along with consolidation loans (which we briefly looked at above), a debt management plan is another option to consolidate debt.
Debt management plans are one of the best ways to safely consolidate debt. And this is where a lot of people confuse debt consolidation vs. debt management, so let’s go through it one more time. Basically, a debt management program is a secure consolidation plan where the company consolidates your debt payments within the program. You will make one monthly payment for all of your unsecured credit card bills to your credit counseling agency. That agency will then distribute your money to your creditors every month on your behalf which helps you plan monthly expenses and adhere to your budget.
The realm of finance can truly feel like another, unfamiliar world. But with a little bit of research and explanation, it isn’t as intimidating as you once thought.