Paying off debt can be challenging, but options exist that can help make the process less overwhelming. Two options to consider are a debt consolidation loan or a debt management program (DMP). Both are designed to help you better manage your debt. However, there are pros and cons to consider before making your choice on which one is best for you.
Debt Consolidation Loans Explained
The purpose of taking out a debt consolidation loan is to consolidate debt like credit cards, medical bills, and auto loans into one monthly payment. If you have good credit, you may be able to also get a lower interest rate, reducing how much you owe overall.
Debt consolidation loans can help you streamline your repayment and lower your credit utilization, which is the amount of credit you’re using vs. available credit. This is good for your credit score because credit utilization makes up 30% of your score.
However, you will have to qualify for the loan first. Lenders will typically check your credit score, income, and debt-to-income ratio. If you have bad credit you may be denied, or you may end up with a high interest rate, which could mean you end up paying more. Depending on how much you get approved for, you may still have to pay on other debts while paying on the consolidation loan.
Debt consolidation loans also don’t fix the root of the problem. If you don’t fix your spending habits, you’ll continue to stay in debt.
How a Debt Management Plan Can Help
A debt management plan is a program you can enroll in through a certified credit counseling agency. A counselor will work with your creditors to reduce your interest rate and consolidate your debt into one affordable monthly payment that works for your specific situation. A DMP is designed to help you pay off your debt in three to five years. You’re not taking out any new loans, which can be risky, but just paying off what you owe in a more efficient way.
While you’re expected to refrain from opening new lines of credit, counselors will usually work with you on budgeting and your financial goals, helping you create better spending habits.
While a debt consolidation loan may seem like a good option for you, there’s no risk with a DMP. Instead, you’ll find a supportive environment to help you throughout the repayment process.
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