Dealing with a debt problem is difficult enough without trying to navigate through all the terms, definitions, and industry jargon. Consumers are routinely confused when it comes to understanding what debt consolidation, debt settlement, debt management, and credit counseling really are. To make matters worse, many companies in the industry use incorrect language when referring to products offered to customers.
Understanding these terms is vital if you plan to utilize any financial tool to mitigate an oppressive debt situation. While they may sound similar, the terms listed above represent entirely different things.
What is debt consolidation?
Stated plainly, debt consolidation is rolling all of your debt into one single loan with one single payment. There is much confusion in the marketplace about debt consolidation. Many companies in the business of offering debt solutions use this term freely and apply it to other processes that are not truly debt consolidation. Unfortunately, many companies out there don’t have the best interests of consumers in mind and make an effort to keep potential customers confused about the tools available to them to deal with their debt problem.
True debt consolidation is a relatively simple process. By utilizing the equity in their home, or by obtaining a personal loan, consumers use the proceeds to pay off their numerous accounts and combine them into one loan that has a better interest rate and a single, lower monthly payment.
What is debt management?
Debt management is a broad term that the industry routinely uses interchangeably to describe a wide variety of financial product offerings. This is where things can get very muddy, even for the most perceptive of consumers. Offerings such as credit counseling, debt consolidation, and debt settlement can all loosely fall under “debt management.” It’s important that consumers ask many questions before signing off on anything.
Debt management, in its purest form, refers to the process of hiring a company to manage your credit accounts and make payments for you. It will look to reduce interest rates and negotiate more favorable terms on your behalf.
Some things you should know when considering a true “debt management plan” are as follows:
- The debt management company you hire will close all of your debt accounts, attempt to negotiate better terms for you, and set you up on a repayment plan.
- You will make payments to the debt management company, which, in turn, makes payments to your creditors.
- You will have a defined repayment term, such as five years, that you will be obligated to fulfill.
- Fees will most likely include a signup fee to establish your membership with the company and monthly fees that you will pay for the life of the contract.
If you are considering a “debt management plan,” be aware that many companies offer debt management services, some more reputable than others. It’s important to research a company, read reviews left by former customers, and ask tons of questions. Compare fees and gather information that allows you to make an informed decision.
Which is better, debt consolidation or debt management?
The answer to that question depends entirely on your individual circumstances. For instance, if you have relatively good credit, and you haven’t fallen behind in your payments, then a true debt consolidation loan may be the right decision for you. However, if the total amount of your debt exceeds the available equity in your home, or you are behind in your payments, a debt management plan may be the better alternative. Whatever your debt situation, careful research and due diligence will serve you well.