Is debt management better than debt consolidation?

4 April 2008

As with most questions about debt, the answer is `It depends`.

It depends on the individual. Not just the amount they owe, but their financial history, their attitude to dealing with creditors – and their confidence in their own financial skills.

What exactly is debt consolidation?
You take out a new loan that’s big enough to pay off all / some of your existing debts. This can:

• Reduce the interest charges – if you owe money to credit cards, store cards and other high-interest debts, there’s a good chance you could find a consolidation loan with a lower interest rate.
• Reduce the monthly payments – you could arrange to pay the loan back slowly, which means each payment will be smaller (but you’ll have to pay for longer).

What exactly is debt management?
You ask a debt management company to negotiate with your creditors on your behalf. Depending on which company you’re dealing with, they might:

• Ask creditors to accept lower monthly payments, waive charges and / or freeze / lower interest.
• Reply to letters and phone calls on your behalf.
• Handle payments for you – you send them one monthly sum, and they pay each of your creditors the agreed amount.

Which is right for me?
For people who can’t keep up with their monthly payments, debt management might be a good idea – on Gregory Pennington’s debt management plan, for example, everyone gets a Personal Finance Manager, who provides advice and helps them manage their finances, as well as negotiating with their creditors.

Debt consolidation might appeal to people who can meet their financial commitments, but want to make their debts more manageable – consolidation can really simplify their finances by paying off all those credit cards, store cards and so on. However, it can take self-discipline to avoid the temptation to run up fresh debts on things like cards and overdrafts. Anyone who’s not sure they can resist that temptation might be better off with debt management. Plus, in today’s credit crunch, lenders have become more cautious about giving people credit, so anyone who’s had a lot of financial problems might find it hard to get a consolidation loan.

Please note: debt management and debt consolidation aren’t the only debt solutions out there. People with significant debts might want to look into an IVA (Individual Voluntary Arrangement) or, if they live in Scotland, a Trust Deed.

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