Unpopular as it may be, the fact is that there are no fast fixes when it comes to getting out of debt. A debt consolidation loan may help you, but it isn’t going to work wonders overnight.
Isn’t there an ancient story about the tortoise and the hare that you remember? Yes, in any race, especially in the fight against debt, going slow and steady is always the best strategy.
Debt consolidation and debt management plans are both financial strategies used to eliminate the debt burden. Both have similar prospects but approach things differently, due to which people often get confused between them.
In this article, we’ll take a look at both options, their differences, and see which one is better. Let’s get on with it.
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What Is a Debt Consolidation Loan?
A debt consolidation loan combines your various debt obligations into a single, larger debt with favorable terms and payoff conditions. Favorable terms can include lower interest rates, payment structures, and incumbencies.
Debt consolidation is used by consumers to deal with liabilities like credit card bills, student loans, personal loans, etc. There are various forms of a debt consolidation loan including debt consolidation personal loan, debt consolidation retirement loan, HELOCs, and more.
Pros and cons of a loan:
- A debt consolidation loan provides lower interest rates
- It reduces monthly payments
- It can help you pay off your debt faster
- It can significantly improve your credit score if you’re consistent with your payments
- It includes many upfront costs
- If your credit score is below average, you may have to pay higher interest rates
- Although it can help you get out of debt faster, it may not solve your financial problems
When should you consider a loan?
You should consider a loan when/if:
- There’s a substantial amount of credit card debt hanging on your head
- Your credit score is high enough to qualify for a low-interest credit card
- You have enough money to comfortably pay off monthly payments
- You’re looking to improve your finances
Debt consolidation with a personal loan
It is possible to consolidate your debt with a personal loan. However, you need to know whether this is the right option for you. This is ideal for those with good credit scores who can get personal loans at low-interest rates. If you can qualify for a low-interest debt consolidation personal loan, you will save money on your loan payments.
As part of the loan arrangement, you agree to return the loan at a predetermined time. You’ll know exactly when you’ll be debt-free if you pay on time since you’ll have your loan term. Consider the possibility that your lender may levy a prepayment penalty if you pay off your loan early.
However, debt consolidation personal loans must be used with caution. Any default can affect your credit score significantly. Besides, you could also be hit with fees, or you might end up paying more interest charges.
If you decide to use a personal loan for debt consolidation, you need to explore different options from different lenders in the market. This will give you an idea of whether personal loans are suitable for your purpose.
Use the link below to find a list of lenders who could help you consolidate your debt.
What Is a Debt Management Plan?
A debt management plan allows you to integrate all your existing debt into a single monthly payment. Unlike a debt consolidation loan, a debt management plan does not make any reductions to your debt.
However, it simplifies the payment process and cuts off the period associated with the payments by a margin. This is mostly used by people who find themselves trapped in various streams of debt such as car loans, student loans, business loans, personal loans, etc.
Pros and cons of a debt management plan:
- Payments are simplified and paid monthly
- It can help you pay off your debt within 3-5 years
- It lowers your interest rates
- It can help keep your credit score high and consistent
- You might end up losing access to your credit card
- You would need to be consistent with your payment to prevent any penalties
- You would not be able to open new credit lines
When should you consider a debt management plan?
You should consider a debt management plan when/if:
- Your debt is associated with many credit cards or authorities
- You can stop credit card(s) usage
- You have a stable job that helps you make monthly payments consistently
- You can afford the fees associated with the plan
What’s the Difference?
So, what’s the difference between a debt consolidation loan and a debt management plan? Well, to put it simply, the main goal of these financial strategies is kosher debt management, but where the difference comes in is in their approach toward things.
While a debt consolidation loan puts an emphasis mainly on credit card bills, a debt management plan looks after various streams of debt. The drawback? Well, more time and no actual reductions to the debt.
Also, to keep in mind, a debt consolidation loan can drag your monthly payments much lower than a debt management plan. So, should this make it the better one?
Which Is Better?
Now, which one is better for you depends upon your circumstances. You can consider a debt consolidation loan if you’re slammed by a sizable amount of high-interest credit card debt and have a solid credit card score. It will help you pay the debt faster with lower interest rates.
A debt management plan, on the other hand, can be considered if your debt is spread across many different types, and you’re struggling to make payments due to tight schedules. In this case, a debt management plan can help you manage your payments more easily. After all, it’ll be your decision to choose which one’s right for you.
Get Expert Help if Required
Debt consolidation loans and debt management plans are both great solutions to proper debt management. Choosing which one is right for you is ultimately your call, but there’s no doubt that these financial strategies are going to be helpful in one way or another.
If still, you’re unable to determine the right one for yourself, consider seeking some professional consultation. Getting expert help is not a magical fix that will wipe away your debt. However, it can point you in the right direction and provide you with much-needed clarity on prioritizing things.
Paying off your debt may seem like an uphill task. However, it doesn’t have to be an excruciating process. You can manage it easily with the right planning and professional help.
Don’t forget to download our FREE personal finance toolkit that can help you identify the best tools you can use to manage your wealth!