The difference between debt management and debt consolidation

22 May 2009

To some, `debt management` and `debt consolidation` might sound like the same thing, but they`re very different debt solutions.

Even so, they can deliver similar benefits - and similar drawbacks.

Benefits

Debt management and debt consolidation can both:

1. Mean you make just one payment per month, instead of multiple payments to multiple creditors, and
2. Reduce the overall amount you spend on your debt every month.

Just one payment

Join a professional debt management plan with a company like Gregory Pennington and you`ll no longer have to deal with your unsecured lenders yourself. In Gregory Pennington`s case, we would handle all the paperwork and phonecalls to and from your creditors. We`d also handle the payment distribution - you`d make one monthly payment to us, and we`d distribute it among your lenders as agreed.

A debt consolidation loan is even simpler. Once you`d used your debt consolidation loan to pay off your unsecured debts, you`d only owe one creditor - the one who gave you the consolidation loan. You`d owe nothing to your `old` creditors at all.

Lower payments

A debt management plan is only an option for people who can`t keep up with their unsecured debt repayments as they originally agreed. A debt management plan works by negotiating with your unsecured lenders, asking them to accept lower payments that leave you with enough money for your mortgage/rent, your petrol and food, and your various other `essential expenses`. (Please note that failing to keep up with payments as you`d originally agreed will show up on your credit history, potentially making further credit harder to obtain and/or more expensive.)

Taking out a debt consolidation loan gives you a chance to re-think your finances and figure out how much you can afford to pay towards your unsecured debt every month. When you take out your consolidation loan, you need to arrange to repay it at a rate that respects this figure.

Drawbacks

Debt management and debt consolidation can also both come with the same drawbacks. They can both:

1. Increase the total amount you spend on your debt, and
2. Postpone the day your debts are gone and you`re debt-free

Increased total payment

The more slowly you repay any debt, the longer it`ll have to attract interest, and this can add to the amount you repay in total.

Having said that:

• A debt management organisation can ask your lenders to freeze / reduce the interest rate they`re charging, although lenders aren`t obliged to do this. This means your debt will grow more slowly than it was doing - and if they freeze interest altogether, it won`t grow at all.
• A debt consolidation loan could well come with a lower interest rate than the unsecured debts you pay off with it (especially if you`re paying off things like store cards / credit cards). Again, this means the debt will grow more slowly than it was doing.

Postponement of `debt freedom`

Repay any debt more slowly and it`ll obviously take longer before it`s gone. However, as explained above, the debt may also be growing more slowly (than it would have been if you`d kept on repaying your debts without debt management / debt consolidation), and that should reduce the effect of repaying it more slowly.

For more on debt consolidation, click here.
For more on debt management, click here.

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