You’re staring at the credit card bills piling up on your kitchen counter, filled with that familiar dread. The balances seem to grow no matter how much you pay each month. You need to get your finances under control, but you’re not sure where to start. Debt consolidation or debt management – which option is best? Don’t worry, we’ve got you covered.
In this blog post, we’re discussing important differences between these two common debt payoff strategies. We’re looking at the pros and cons of each approach, including how they impact your credit score. We’re also going to discuss when debt consolidation or debt management might be the smarter choice based on your specific financial situation. Prepare yourself with knowledge to make an informed decision about the best path forward to become debt-free once and for all. Let’s start!
What Debt Consolidation Does to Pay Off Debt
So you’ve got interest-ridden debts spread across multiple credit cards and accounts, and you’re struggling under the weight of enormous payments each month.
Reduce Your Interest Rates
The main benefit of a debt consolidation loan is lowering your interest rates, which reduces the amount of interest you pay each month. You take out a lower-interest loan and use it to pay off your high-interest debts. Now you’re making monthly payments on your reduced-interest debt consolidation loan instead of the high-interest accounts. This saves thousands of dollars in interest charges each year.
Simplify Payments
Juggling multiple bills and due dates each month can be stressful and difficult to keep track of. Debt consolidation simplifies things by allowing you to make a single payment each month towards your consolidation loan. No more worrying if you forgot to pay a bill or dealing with late fees because a payment slipped through the cracks.
Set a Payoff Timeline
When you take out debt consolidation loans, you’re working with your lender to establish a fixed payoff period, usually 4 to 5 years. Make the same payment each month over that timeline to pay off the loan. This can give you a concrete goal to work toward so you can stay motivated and disciplined to pay off your debt.
While debt consolidation can be an effective way to pay off what you owe, it does come with some risks. Make sure you understand the terms of any loan before signing on the dotted line. Shop around at different lenders for the best interest rate. And commit to not racking up more debt on your credit cards after you pay them off, or you could end right back where you started, struggling under the weight of unmanageable debt. With discipline and dedication, debt consolidation can absolutely help you achieve debt relief.
What to Know About Debt Management Plans
A debt management plan (DMP) can help you pay off your unsecured debts like credit cards and medical bills through a structured repayment plan. Unlike debt consolidation where you take out a loan to pay off your debts, a DMP works with your creditors to reduce interest rates and waive fees so you can pay less each month.
How Debt Management Works
When you sign up for a DMP, the credit counseling agency will evaluate your income, expenses, and debts to determine a monthly payment you can afford.
They then negotiate with your creditors to freeze interest rates, waive fees, and reduce your payments. You’re sending a reduced payment to the agency each month, and they disburse it to your creditors.
The Pros
A DMP can reduce the amount you pay each month by up to 50% with lower interest and waived fees. It also avoids damaging your credit score further with debt settlement. As long as you make payments on time, a DMP allows you to pay off your debt in 4-5 years. The counseling agency can help hold you accountable and offer guidance to avoid racking up more debt.
The Cons
Although interest rates are frozen, the total amount you repay may be higher than debt settlement. A DMP may hurt your credit utilization ratio since accounts remain open. You’re also paying a fee to the counseling agency or debt settlement company, typically around $25-$75 a month. The DMP is noted on your credit report, which may concern some future lenders.
Is It Right For You?
A DMP can be a good option if you want to pay off debt with a structured plan without damaging your credit further. However, if you only have a couple small debts or your income has dropped significantly, debt settlement could help you become debt free sooner. Meet with a credit counseling agency to review your options and see if a DMP is the right solution for your situation.
Other Ways to Pay Off Debt
As you work to pay off your debt, there are a couple other options to consider beyond debt consolidation and management plans. Trimming away your interest charges and paying down principal faster can help you become debt-free sooner.
Negotiate Lower Interest Rates
If you have good credit, you may be able to negotiate lower interest rates with your creditors, especially on high-interest debts such as credit card debt. Give them a call and explain your situation. They may be willing to lower your rate, especially if you threaten to transfer the balance to a lower-interest card. Every percentage point drop in your rate means more of your payment goes to principal.
Pay More Than the Minimum
Paying just the minimum due each month is the slow road to debt freedom. If you can afford to pay a bit more, do so. Even increasing your payments by $10 or $20 a month can shave months off the time it takes to pay the debt. As you pay off one debt, roll that payment into the next debt on your list. This snowball effect will help you gain momentum.
Trim Expenses
Find ways to trim your budget so you have more money each month to put toward your debt. Things such as eating out, entertainment, and hobbies are common areas where people overspend. Cook more meals at home, look for free or low-cost activities, and find less expensive hobbies. Put any money saved toward your debt payments.
Take a Side Hustle
If reducing expenses isn’t enough, consider taking a side gig to earn extra money for debt payments. Drive for a ridesharing service, do freelance work like writing or graphic design, or get a part-time retail job. Put all the money from your side hustle toward your debt. The more you can pay over the minimums each month, the faster you’re going to be free from debt.
Paying off debt often takes a combination of these strategies. Look for ways to lower your interest charges, increase your payments, trim your budget, and earn extra income. Stay focused on your goal, and celebrate each debt you pay off. With time and persistence, you could conquer your debt.
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