If you are someone who has been struggling with multiple debts including personal loans and credit card bills etc then you’ve probably come across debt relief solutions. Two of the most popular financial strategies are debt consolidation loans and debt management programs. Both aim to simplify your debt and help you regain financial stability however they work very differently.
You might wonder which bank consolidation loan options are available and how they compare with other debt relief solutions. To ensure that you are making the right choice, it’s important to first learn and understand the distinctions between both the strategies. The option you choose can either help you get out of debt quickly or land you into deeper high interest debt if it doesn’t align with your financial goals.
Want to know what each option entails? This is exactly where you need to be! We’ll guide you through both debt consolidation loans vs debt management programs so that you can make a more informed decision.
What Is A Debt Consolidation Loan And How Does It Work?
Debt consolidation is all about rolling multiple high interest debts into a single new loan with a single monthly repayment and a comparatively lower interest rate. Here’s how it works;
- You apply for a debt consolidation loan (unsecured)
- You use the funds to pay all of your existing debts
- You repay the new consolidation loan with a fixed monthly payment
Debt consolidation is best suitable for people with a fair credit score. To qualify for the best loan terms and low interest rates, banks and credit unions often consider your credit history and score. With a fair to excellent score, it’s easier to secure a low interest loan (that can help you achieve your consolidation goals).
Pros And Cons Of Debt Consolidation Loans
Pros
- If you have a good credit score, you’ll be offered low interest loans
- You’ll only have to manage a single monthly repayment instead of juggling between multiple payments
- If you succeed in paying off your consolidation loan with consistency then your credit score will improve over time
- The repayment schedule is fixed.
Cons
- You need a reasonable credit score to qualify
- You might have to deal with upfront fees or prepayment penalties
- If you continue using credit cards, you might end up into deeper debt
- It won’t reduce the total amount you owe.
What Is A Debt Management Program And How Does It Work?
Just as the name implies, a debt management program isn’t a loan, in fact, it’s a restructured payment plan devised and managed by a nonprofit credit counseling agency. This is one of the most effective debt relief solutions available. What happens here is that the agency you hire, negotiates with your credit on your behalf to lower the interest, waives fees or create a more affordable monthly payment plan. Here’s how it works;
You hire a credit counseling agency that reviews and evaluates your finances
The agency negotiates with your creditor on your behalf
You make a single payment every month to the agency and it gets distributed to your creditors as per the payment plan.
A debt management plan is best suitable for those who are dealing with multiple high interest debts with a poor credit score. If you need professional help in negotiating with your creditors to make the repayment terms more favorable then hiring a credit counseling agency is the best move.
Pros And Cons Of Debt Management Plan
Pros
- Waived fees with lower interest rates
- You get professional guidance in budgeting
- You can easily become debt-free with a new structured payment plan
- You don’t need to have a good credit score to qualify for this strategy and there’s no need to take up another loan
Cons
- As the process involves closing credit accounts, your credit score will suffer
- You’ll have to pay a monthly service fee to the agency
- It might take you around 3 to 5 years to become debt-free
- In case of any missed payments, you’ll end up with void concessions
Side By Side Comparison Between Debt Consolidation Loans Vs Debt Management Plan
| Feature | Debt Consolidation Loan | Debt Management Plan |
| Type | It’s a new loan | It’s a restructured payment plan |
| Credit Score Requirement | Fair to excellent score is required to secure better loan terms | Fair or poor credit scores are accepted |
| Interest Rates | Depends on your credit score | Lower interest rates after negotiation |
| Impact On Credit | Temporary dip in credit score but can be improved over time | Initial dip, can be improved later |
| Account Closure | Your accounts usually remain open | Most of your accounts are closed |
| Time To Pay Off | 2 to 7 years | 3 to 5 years |
When Should You Choose A Debt Consolidation Loan?
As said earlier, between personalized debt consolidation and debt management plan, there’s no one option that fits all. In fact, it all depends on your financial circumstances and where you stand with your debt. Here’s when choosing debt consolidation loan would work in your favour;
- You have a fair to excellent credit score
- You are qualifying for a loan with a lower interest rate as compared to what you are paying with your existing debt
- You want to manage your debt independently without involving any third party
- You don’t plan to take up another loan anytime soon.
Example: You owe a total of $30,000 across multiple credit cards at a 28% APR. You successfully qualify for a $30,000 personal loan at 20% APR for 3 years. Not only will it reduce your monthly obligations but you’ll save a significant amount on the interest too.
When Should You Choose A Debt Management Plan?
Here’s when opting for a debt management plan is the better option;
- You can’t qualify for a low interest loan due to bad credit score
- You find it difficult to deal with multiple creditors all alone
- You want to involve a third party to negotiate the loan terms for you with your creditors
- You are willing to close your accounts in order to focus on the repayment.
Example: You owe $20,000 on your credit cards with a 23% APR. With the help of a credit counseling agency, you opt for a DMP and the agency negotiates the APR to 10%. In this situation, you’ll be able to save hundreds on interest every month.
Which Option Is Better For You?
You should choose a debt consolidation loan if you qualify for lower interests and overall better loan terms. It’s best suitable for people who prefer managing their debt independently.
Go for a debt management plan if your credit score isn’t up to the mark and you want an agency to help negotiate the interest rates with your creditors. In a nutshell, if you want professional support when dealing with debt then a DMP is just the right fit for you.
Final Verdict
Both debt consolidation loan and debt management plan come with a similar goal and that is to help you deal with multiple high interest debts. However, the main difference lies in how it’s done. To ensure that you are taking the right step forward, it’s best that you first evaluate your finances, your overall circumstances and your credit profile.
Once you know where you stand financially, it’ll be a lot easier to make an informed decision. With a strong credit profile, applying for a debt consolidation loan will work wonders for you as you’ll be able to qualify for favorable loan terms and rates. On the other hand, if you need hand-on help to get some concessions from your creditors then go for a debt management plan.
FAQs
Q1. Will A Debt Management Program Hurt My Credit Score?
Yes, a debt management program will hurt your credit score initially mainly because you’ll have to close almost all your accounts. However, the impact is temporary and you can take certain measures to improve your score like; make timely payments and avoid new loans.
Q2. Is It Possible To Qualify For A Debt Consolidation Loan With A Poor Credit Score?
It’s difficult but not impossible. Especially when it comes to banks, they have stricter lending criterias and they require a fair to excellent credit score to accept your loan application. In case of a poor credit score, you can try online lenders or credit unions as they are more flexible but you’ll still have to pay higher interest rates.
Q3. Can I Continue Using My Credit Cards In A Debt Management Program?
Typically no, you can’t continue using your credit cards because credit counseling agencies require you to close all of your accounts so that you don’t take up any new loan during the process.
Looking for other debt relief solutions and not just loans? Let us help you find the best fit as per your financial situation and consolidate your debt without any hassle. At Mountains Debt Relief, we have just the right expertise and experience you need to become debt-free.