Debt consolidation vs. debt management: a comparison
January 11, 2012
There are solutions for dealing with all kinds of debt, whether you’re on the verge of bankruptcy or simply trying to make managing your finances easier.
Two of the most common debt solutions in the UK are debt consolidation loans and debt management plans. Each solution is designed to help with very different circumstances.
Debt consolidation loan
A debt consolidation loan is a new loan used to pay off existing debts. This means you’ll effectively be replacing several different debts with just one, which can make budgeting a lot simpler. You should also be able to reduce your monthly payments by repaying the new loan over a longer period than the debts you’re consolidating.
Unlike many debt solutions, a debt consolidation loan won’t harm your credit rating - in fact, it could improve it, as long as you keep up with your payments. However, if you do choose to extend your repayment period, you’ll probably pay more interest in the long run.
Read more about debt consolidation loans on this site.
Debt management plan
A debt management plan is a new repayment plan for people with unaffordable debt repayments. It works by reducing your unsecured debt repayments to a level you can afford once you’ve covered your other essential costs (e.g. food and bills).
Your lenders don’t have to agree to this, but are likely to do so if you really can’t afford your debt repayments. All being well, your reduced payments will continue until you can afford to make full payments again (or if that doesn’t happen, until the debts have been paid off).
Because it involves paying less than you originally agreed, your lenders will only accept a debt management plan if you really need it. For the same reason, it will affect your credit rating, with records of your lower payments staying on your credit history for at least three years.