The finance industry has numerous terms relating to the different transactions. When it comes to debt, there are a handful of terms that are crucial to helping individuals in managing them. What’s more, the terms sound similar creating some confusion to the individuals. In order to help clear up the meaning, we will discuss two common terms namely debt consolidation and debt management. You will get all the information to guide with your choices.

Debt Consolidation

It is the process of combining debt accounts into one. You combine many small debts into one large debt. When the debts are combined into one, the individual takes out a single loan that is used to pay all of the debts. In most cases, the loan taken out is at a lower rate of interest. Moreover, the monthly payments are also lower. This act is suitable for people who have numerous credit card and unsecured debts.

The upside of consolidation is the low-interest rate and monthly payments. Another benefit is it allows the individual access to other forms of credit while paying the existing debt. Users are advised to only use this option when they are certain that the interest rate is lower for a longer duration. This is because many of the low-interest offers are during the introductory period and therefore might change.

The disadvantage of debt consolidation is that any default in payment as per the agreement may lead to a massive decrease in your credit score. Therefore, ensure that adherence to the terms occurs.

Debt management

Debt management is where you engage the services of a debt counselor or agency such as Ferratum Bank. You enter into a debt management plan where they take over the debt on your behalf. Your only obligation is to deposit money with the agency or counselor and they pay the debts on your behalf. A debt management plan is limited to student loans, medical bill, and credit cards. The most common are credit card debt payments.

The advantage is that the agency negotiates with the creditors and can lower the interest rate and monthly payment amounts. Moreover, they may negotiate a waiver on some of the charges.

There are several downsides to this agreement. Firstly, you will incur costs to pay the agency to take over the debt on your behalf. The charges may include an enrollment fee and monthly charges for services rendered. Secondly, the plan takes about three to five years tying you to the agency. Moreover, the payments should be made as per the agreement and failure may negatively affect the financial records. Finally, you might be limited from using any more credit during the process of debt management.

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Similarities

There are similarities between debt consolidation and management that you need to know about. The two help to simplify the debt position of an individual. Although they use different methods, one is left making one payment for all the debts. In consolidation, it is one payment to the one combined debt while in management it is payment to the agency.

Another similarity is the decrease in the rate of interest and monthly payment amounts. In addition, they both minimize the number of collection calls from the creditors saving one from bankruptcy.

Differences

A debt management program effects a change in lifestyle while the consolidation only effects a transfer of debt. The debt consolidation is open to many types of debt while the management plan restricts to credit card, medical and medical bills. Debt management offers a lasting solution since the management is under an agency while with consolidation is not.

Debt Consolidation vs. Debt Management tips from a Mortgage Broker