Debt Management Plan Vs. Debt Consolidation – Which Strategy Is Right For You?
There are different routes you can take for help when you are drowning in debt. You are not the only one with this sense of helplessness when you can’t pay off your debts. According to the US Census Bureau and the Federal Reserve, US households have an average debt of $110,095.
Depending on how much debt you have, your options may be limited. It is also hurting your credit score. So, you need to tackle your debts to get back on your feet. Debt consolidation loan and debt management plan are two of the few options available to you. To help you, we are comparing debt management plan and debt consolidation loan.
Debt Consolidation Loan
With debt consolidation, you can roll several debts into one and the interest rate will be low. You can use several loans such as balance transfer credit card, personal loan, or home equity loan to consolidate debt. Following are the pros and cons of this strategy:
- You can consolidate any type of debt.
- You will have to remember only one payment.
- You will be paying a better interest rate. So, you can save money.
- While you are paying off your debt, you can also borrow money.
- You may not qualify for it if you have a fair or bad credit score.
- You will dig yourself into a hole if you borrow when while paying off your debt.
- There are balance transfer fees or loan origination fees.
Debt Management Plan
Debt management plan also allows you to consolidate your debt into one monthly payment with a lower interest rate. However, you will not pay your new creditor. You will make payment to a debt management company. The company will make payments to your creditors.
Debt management companies in NJ offer debt management plans to help people like you. A debt management plan includes small balance loans, credit card loans and other unsecured debts. It does not include mortgage, auto financing and other collateralized loans.
A debt management plan typically works for three to five years. And, you cannot borrow money until you are done. Your creditors can suspend or close your account. So, you will not be able to use your current credit cards.
- It is a forced discipline. You cannot borrow money while you are making payments.
- You are not applying for a loan. You do not need to meet special credit requirements.
- You will have to make only one payment.
- Your interest rate will be reduced.
- Even when only one or two of your debts are giving you trouble, you have to include all the debts in the plan.
- A debt management plan indicates that you have had financial troubles. This might make it a little difficult to get your credit card approved.
- If you are not making the originally agreed payments, creditors might hurt your credit score by reporting.
- A debt management plan includes only a specific type of debts.
Making The Right Choice
You have to determine which option is better for your current and future financial situation. If you have a modest amount of loan and a high credit score, a debt consolidation loan may be the right option for you.
If the debt balances are already grown out of your control and you are in danger of falling behind the payments, approach one of the best debt management companies in NJ.
Whether you are working with one of the debt management companies or you are going for a debt consolidation plan, you have to address the real problem.
- Why did you get into debt?
- Will it happen again?
Take an honest look at the wrong decisions you made. Make sure that you are not going to repeat those mistakes.
In some situations, debt management companies can help and in some situations, a debt consolidation plan is better for you. Now, you know the pros and cons of both strategies. Hope this will help in making the right decision.