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Debt Management or Debt Consolidation Programs: What’s the Difference?

Debt management or debt consolidation programs

If you’re trying to pay off debts, you’ve probably heard that debt management or debt consolidation programs could help you. Before you decide to go with one or the other, it’s important to understand the difference between the two terms: “debt management” usually refers to a program run by a nonprofit credit counseling organization, and “debt consolidation” means a loan from a for-profit lender. Here’s what you need to know about debt management and debt consolidation when choosing between them.

Debt Management

In a debt management program, a credit counseling organization negotiates with the consumer’s creditors for better interest rates or to extend the term of the loan. The consumer then makes one monthly payment through the credit counseling organization; this payment is divided and distributed to the different creditors, and the credit counseling organization deducts a small fee to cover the cost of the service. As part of the agreement, the consumer is not allowed to take on any new credit card debt while participating in the program.

Debt Consolidation

A consumer who consolidates her debt does so by taking out a new loan at a better interest rate than what she has been paying on her previous loans. She uses the proceeds to pay off the previous loans immediately, and she continues making monthly payments to pay off the new, lower interest loan. Debt consolidation offers no mechanism to prevent the consumer from charging additional purchases to high-interest credit cards and getting deeper into debt.

Choosing Debt Management or Debt Consolidation Programs

Debt consolidation can make sense for people who have good credit and can obtain unsecured low-interest loans. For consumers who can’t borrow at lower rates than they’re paying on their current loans, or who can do so only by accepting the risk of a secured loan like a home mortgage, debt consolidation doesn’t offer a financial advantage. Debt management is a good alternative for people who won’t benefit from consolidation provided that their debts qualify for the program and that they have enough income to make monthly payments.

Be aware that although debt management programs and debt consolidation are different, people sometimes use similar words to describe them. For example, someone could say that a debt management program consolidates payments because it allows you to make a single monthly payment instead of separate payments to different creditors. And a salesman trying to convince you to take out a consolidation loan might claim that it will help you “manage” debt. Whatever a financial program is named, learn its conditions before you agree to it.

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