What are they and what are the differences between debt consolidation loans and debt management

A friend of mine had recently mentioned to me about the confusion between what is a debt consolidation loan and what is debt management.  This didn’t really surprise me as many consumers, borrowers, debtors, etc, can be confused by the various loan products and banking/financial terms used today.  Basically unless you are in the banking industry, or a debt adviser, you may not fully know the differences between these two very different options.

Debt management is where someone may be struggling with various credit cards, overdrafts, loans, etc and can no longer service the debts in accord with what the accounts or their creditors are asking for payments each month.  So the debtor, seeks help and assistance via some other form of repayment, usually through a third party, in managing the debts through alternative means.

This assistance can be in the form of a DMP/Debt Management Plan, or possibly an IVA/Individual Voluntary Arrangement.

Debt consolidation is where someone may take out a loan to consolidate, or pay off the smaller loans and credit cards they may have.  This gives them one monthly payment, and in some instances a lower monthly payment, than what they had previously been paying to the smaller multiple accounts.

Debt management is not a form of a loan and no money is lent, whereas debt consolidation is a loan that is applied for from a bank or lender and can be granted or denied.

In debt management you are usually in arrears with a loan or credit card and this has affected your credit, and by being in some form of debt management, this also affects your credit.

Debt consolidation does not affect your credit, and you may have poor credit prior to receiving the loan, but for some people, the deb consolidation loan itself may help to improve their credit.

Both, debt management and debt consolidation allows you to make one monthly payment instead of multiple payments.  With debt management the monthly payment is based on what you can afford and again impacts your credit.  In debt consolidation the monthly payment can be less than what you previously had been paying to the multiple accounts, and it doesn’t have a negative mark on your credit. The debt consolidation payment is based on how much you are borrowing, the interest rate, and for how long you are borrowing the money.

So in discussing this with my friend, I asked him how he determines which option is best for his clients.

He stated, if someone is currently in arrears with their credit cards and accounts/loans and possibly has experienced a major change in their finances, hours cut at work, made redundant, etc, and then debt management may be a stronger option for them.

If they are just looking to reduce their monthly outgoings and want to budget a bit better, then a consolidation loan may be a better option for them.

If their credit is already showing late payments and defaults, then a form of debt management may be the way to go.

If they are concerned about your credit rating and want to maintain it, then debt consolidation is what they may want to look more into.

So there you have it, straight form the horse’s mouth, so to speak, not only the difference between debt management and debt consolidation, but also a professional’s advice on which may be best suited for someone.