You're ready to tackle it and get out from under your finances, but you're not sure of the best way to do it. How can you know what option will be best for the kind of debt you're facing? This post will tackle debt consolidation and debt management, so you can determine which option is best for you.
The Difference between Debt Consolidation and Debt Management
What is Debt Consolidation?
- Pros: This helps you pay less interest, which helps you get out from under your debt faster. While it might seem backward to take on debt in order to get out of the debt you've gotten yourself into, it can actually help you save a lot of money in the long run.
- Here's an example: Let's say you have a credit card with a $3,000 balance that charges 20% interest annually, with a payment of $100 a month; a student loan with a $10,000 balance that charges 10% annually, with a payment of $200 a month; and a car loan with a balance of $5,000 that charges 15% annually, with a payment of $250 a month. You'd be paying around $550 a month towards those debts, as well as interest from each of your debts. The credit card would wind up with $1193.50 in interest, the student loan with $2989.70, and the car loan with $1535.41. That's a total of $5718.61 a year in interest alone. Using debt consolidation, you'd still pay $550 a month. However, you'd only be paying $3105.93 in interest each year, for a savings of $2612.68 per year.
- Cons: While this can be a great option for many households, it's important to remember that this is still a loan. You're still subject to monthly payments and interest rates, and you'll still experience issues if you miss a payment.
Related: The Debt Master Plan
What is a Debt Management Company?
Debt Management companies work with creditors to help you reduce your interest rates and monthly payments. Most debt management plans take 3-5 years to pay off. These companies create plans that help you pay off unsecured debts like medical bills, student loans, and credit cards while allowing you to regain control of your finances.
- Pros: Many of these companies will help you create a plan that works around your needs and income. You'll know ahead of time what monthly payment you need to make on your debts. For those who aren't familiar with budgets, or who don't have a lot of experience in managing your finances, working with these companies is a great way to create realistic budgets and goals. Credit collectors are also less likely to call you, as they can see that you are working on paying them back.
- Cons: However, you'll want to be careful when deciding to work with a debt management company. Make sure there are no complaints against them from the Better Business Bureau, or the state Attorney General's office. You'll also want to make sure the company is licensed to help you. Watch out for hidden fees along the way.
- One of the biggest downsides of using a debt management company is that your credit score is likely to drop. Because these companies renegotiate your financial obligations, they can create late payments or close accounts that you have a good history with. However, this change isn't usually long term and may help you improve your credit in the long run.
How to Decide Which is Best For You
Debt consolidation is more of a tool to help you reduce your debt, while debt management companies provide you with an itinerary of how to get there. If you believe you can manage your debts, but you just want to decrease the overall amount of interest you end up paying each year, debt consolidation is the way to go. However, if you're unsure of how to change your financial behavior, and need help figuring out how to get out of your debt situation, a debt management company can help you do that.
Take a look at your spending history. Look at all of your accounts together, and figure out if this is something you think you can manage on your own. Don't be afraid to ask for help to get to a better life! If you know that you're terrible with finances, a debt management company could be the way to go. But if you just need a little assistance to get back on your feet, check out debt consolidation first.
Whichever option you decide to go with, make sure you shop around to get the best rates and services available.