Finance Tips

Figuring out the difference between a debt management service and a debt consolidation loan can be a little tricky. While both are designed to lower your payments and get you out of debt, each goes about this task in a different way. It is important to understand the differences between the two services so you can make an educated choice about which one would work best for you.

Debt Management Services

Debt management services offer many types of assistance and resources to help you lower your debt. Usually these services are non profit and they work with you to prepare a budget that will help you get out of debt and stay out of debt. They tend to be more fixated on educating the consumer on money management more than anything else. They often offer one to one counseling, finance classes, budgeting workshops, and bankruptcy counseling. Their goal is to get you back on financial track. Some debt management services also work with your creditors to lower your monthly payments, lower your interest rates, or even reduce or remove late fees and finance charges. Debt management companies don’t lend you the money to pay off your high interest credit cards, turning many payments into one.

Debt Consolidation Loan

A debt consolidation loan is a loan that is used to pay off higher interest loans like credit cards. It usually reduces your monthly payment and your interest rate, making it easier to pay off your debt faster. When you have more money to live on each month that can help to keep you out of further credit card debt. Often a consolidation loan requires that you own a house, so that the loan can be taken against equity in the home. There are risks involved with putting your house up for collateral on a debt consolidation loan. Should something unexpected happen to your income and you find that you can’t make your loan payment, you could lose your house. While this is an unlikely scenario, it is a possibility and should always be considered.

Even if you are watchful of your budget, things do happen. Particularly tragic to a household budget is a large, sudden debt, or the loss of income which may hinder your ability to repay.

debt negotiators may be able to help you come to equitable settlements for your debts.

Professional debt negotiators can work with your creditors to explain the situation and to negotiate on your behalf. Even if your creditors refuse to offer a repayment plan that suits you, don’t jump to the ‘bankruptcy’ mind set. Recent federal laws now require credit counseling before proceeding into bankruptcy. But there are also federal laws to help protect you from unscrupulous collection agencies.

The primary reason creditors may accept a settlement is because it is cost effective for the creditor. The degree of the discount (how much they will forgive) will vary case-by-case; therefore, a creditor will take into account many factors when determining their bottom line on accepting a settlement.

They calculate the probability of recouping the debt; either by a collection agency or via legal action, versus the amount of a settlement offer.

Before they agree to any settlement, they will often consider your income, state of residence, age of the debt, type of debt, and your assets.

Professional negotiators will appeal to your creditors that it is in their best interest to settle the debt.

Major difference between Debt Management and Debt Settlement

Debt Management

In a debt consolidation program, also known as a Debt Management Plan (DMP), the debtor pays back 100% of their debt plus interest. Interest is commonly reduced to the 8% to 10% range. Additionally, most Debt Management Companies have a monthly service fee tacked on to the monthly payment. Most people pay back about 130% of their debt over 5 to 6 year period. Debt Management has a moderate affect on a good credit file and will improve most poor credit files. But, a Certified Debt Arbitrator is qualified to explain both programs to you and will be able to provide you the differences in monthly payments as well as the pros and cons of each program.

Debt Settlement

In a Debt Settlement program, most clients pay back an average of 54% of their total debt, including all agency fees as well as accruing fees and interest. This 54% figure is based on the client’s starting balances.

Debt Settlement has a major impact on good credit but will improve credit for people that are 6 months or more past due. This improvement in credit profile is caused by bringing outstanding balances down to a ZERO balance.

Is debt settlement right for you?

Some consumers get so deep into debt, that bankruptcy seems their only way out before debt takes over their lives. Unlike bankruptcy, debt settlement is a far simpler process in comparison, and has less of a ‘stigma’ attached to it.

When you’re struggling with debt and looking for profession help, you have
four options: credit counseling, debt negotiation, debt management, or debt
consolidation. While credit counseling and debt consolidation are both pretty
straightforward services, many people have trouble understanding the difference
between debt negotiation and debt management. This article compares the two
services, and it will help you to determine which service is right for you.
First, ask yourself these questions:

Does My Problem Stem From An Inability To Afford My Debt Payments?

If you answered yes to this question, debt negotiation is probably the choice
for you. Debt negotiation services call your creditors on your behalf and
negotiate lower payments. You keep control of sending out your payments each
month, but your debt negotiation company will negotiate payments with your
creditors that you can afford. Additionally, if your reasons for being unable to
afford your debt payments stem from a circumstance that is not beyond your
control, credit counseling is usually available.

Does My Problem Stem From An Inability To Both Afford and Manage My Debt
Payments?

If you answered yes to this question, then you’re probably in need of the
services of a debt management company. In addition to negotiating lower payments
with your creditors, debt management companies will distribute your payments to
your creditors on your behalf. You simply send them one combined monthly
payment. If you have trouble remembering to pay your bills on time every month,
your credit will greatly benefit from the services of a company that ensures
timely payments.

Debt management differs from debt consolidation in that debt consolidation is a
loan that consolidates all of your debts, and debt management is just a service
that calculates the balance of all of your payments and combines them for you.
With debt management, you still hold all of your original credit accounts.

The most important part of seeking professional debt services is getting
counseling in order to prevent future debt problems. Any professional debt
service should also provide counseling in order to teach you how to stay out of
debt once their services have ceased. Debt services are not meant to be a way
for you to escape your financial responsibilities; rather, they are a way for
you to educate yourself on responsible handling of your credit and debt.

The average person carries about eight or nine credit cards! And if you have that many–or even more–you may be looking for a way to consolidate your debt into one, easy monthly payment. Fortunately, you have some options. You may want to consider:

A loan

If you’re a home owner, a Home Equity Loan, Home Equity Line of Credit or second mortgage is probably the least expensive way for you to borrow a lump sum of cash for debt consolidation. By tapping into the equity in your home, you can pay off your creditors so that you only have one creditor–your Home Equity lender–to worry about each month. If you’re not a home owner, you might still be able to secure a relatively low interest rate personal loan if you use an item of value that you own as collateral, such as your car, your boat, stocks or bonds, or jewelry.

Another credit card

Sure, the idea of getting yet another credit card might sound crazy and irresponsible. But the key is to sign up for a low interest card and then transfer ALL the balances from your old cards onto your new one. That way, you’ve consolidated all your credit cards onto a single one. And you don’t have to sign up for a new account if you already have a card that has a zero balance plus low interest. In that case, you can simply transfer your other credit card balances to the low interest card you already own. Either way, it’s a simple and relatively painless way to consolidate your debt.

Get professional help

Can’t qualify for a loan or a new credit card? It’s possible you need professional assistance. Debt consolidation companies–also called debt management companies–can help you lower your interest rates, lower your minimum payments and consolidate your debt into one monthly bill. You can find a debt consolidation company by searching online, asking friends and family, or checking your local yellow pages.

Try using one of ABC Loan Guide’s Recommended Debt Consolidation Companies.

No matter which choice you make, debt consolidation can help you get back in control of your financial life. By consolidating multiple credit card payments into one bill, you’ll find it easier to make your monthly payment on time. Moreover, many debt consolidation options allow you to lower your interest rate and minimum payments, which can help you save money and pay off your debt faster.