Depending on your level of debt, you may be considering debt consolidation or a debt management plan to get yourself out of the red. However, it's important to understand the risks associated with each option so that you can make the best decision for your financial situation. Choose the method that will help you to get out of debt and stay debt-free, too.
Bill Consolidation
Bill consolidation is generally referred to as debt consolidation. These terms may be used interchangeably to refer to a method of gathering up multiple debts under a single new loan. Debt consolidation is generally best for those who have problems keeping track of all of their monthly payments. If you can qualify for a loan with a lower interest rate than your current debt, you may also save money by consolidating your debts.
Debt Management Plan
To qualify for a debt management plan (DMP), you must work with a credit counselor who deems your financial situation an appropriate fit for the program. Under a DMP, your credit counselor negotiates with your creditors for lower interest rates or payoff balances. The counselor then calculates how much you'll pay over a set period of time, at the end of which your debts will be paid off.
Warnings
When using a debt consolidation loan, it's important to stay committed to getting yourself completely out of debt and staying debt free because you're combatting debt by taking on even more debt. Nothing is there to keep you from spending on your newly freed credit. According to credit union manager Chris Viale, 70 percent of the population that takes out a debt consolidation loan ends up with the same or more debt within two years. Debt management plans do not require you to take on any additional debt, and they do not affect your credit score, since the credit bureaus view DMPs as your effort to improve your credit. However, you may have difficulty obtaining credit in the future, since some lenders view DMPs as a signal that you've had problems controlling your debt.
Considerations
Banks generally require that you have good credit to qualify for a debt consolidation loan, and even if you do qualify, you may not get the rock-bottom prices advertised. Therefore, it's vital to make sure that the interest rates you get are actually lower than those you currently hold. Otherwise, working with a credit counselor to create a budget and a self-help payment plan may be a better course of action for tackling your debt, since it poses less of a risk.
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