Debt Management vs. Debt Consolidation – What’s the Difference?

Written by , August 9, 2012

Debt Management vs. Debt Consolidation What’s the DifferenceIf you find yourself in a difficult financial situation, and you’ve unsuccessfully tried to work through the issues completely on your own, then you may start looking for help. Two possibilities you’re likely to hear our debt management and debt consolidation.

If you’ve never heard of either one of these before, or if you’re not exactly sure what they mean, the differences between the two services can sometimes be a bit confusing. However, the two services are different enough that it’s important to know which one might be more appropriate for you, and under what circumstances.

Here’s a brief discussion of the differences between debt management and debt consolidation.

  • Debt Management Overview. Debt management (also sometimes referred to as “debt settlement”) is a process whereby you first meet with a debt counselor, either in person or over the telephone, and they interview you extensively about your current financial situation. Based on the information you provide, a debt management service will contact your creditors and attempt to negotiate lower interest rates or lower monthly payments – either on a short-term basis or a permanent basis.
  • Debt Consolidation Overview. Debt consolidation generally involves taking out a single new loan to pay off multiple loans, credit cards and lines of credit. The new loan generally has a lower interest rate or a longer repayment term, or both, than the average of all of the other debts that are being paid off. As a result, the net effect is a lower monthly payment.
  • Fees. A debt management firm will charge fees that are often due on a monthly basis, and are generally computed on the basis of the amount you owe (or sometimes the amount by which your total monthly payments have been lowered). Over time these fees can add up, although many individuals in financial distress find that they pay less in fees than they end up saving with the reworked debt obligations. For a debt consolidation you’re only likely to pay an additional fee when the new line of credit is opened. You’ll still be responsible for the monthly interest charges, of course, but these are likely to be lower than what you were already paying.
  • Credit Rating. In most cases, a debt management service is only able to negotiate lower payments after you’ve been late on at least one of your loans or credit cards. Your lender or credit card company generally won’t be likely to work with a debt management consultant if you’re still paying your bills on time, since there’s little incentive to do so? This means that you can usually only get maximum benefit from a debt management service once your credit report and credit rating have already suffered.
  • Planning and Advice. Debt management services will also provide you with ongoing planning and financial advice, to make it less likely that you’ll find yourself in a bad financial situation in the future. Debt consolidation services generally do not include this feature.
  • Before you give serious consideration to using the services of either a debt management or debt consolidation firm, make sure you understand exactly what you’re getting for the fees you’ll have to pay.

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