Debt: management or consolidation?

22 May 2009

There are a number of debt solutions available to people who are looking to clear their debts, but deciding on the right one for your circumstances can be difficult.

Here we take a look at the advantages and disadvantages of two debt solutions: debt management plans and debt consolidation loans.

Debt management plan

A debt management plan is an informal agreement between you and your creditors. If you can reach an agreement with them, you will pay a reduced monthly amount towards your debts, based on what you can afford (once your essential costs have been covered).

As well as reducing your monthly outgoings, it may also be possible to negotiate a reduction or freeze in interest and other charges, which can stop your debt from growing.

It`s possible to arrange a debt management plan on your own, but as this can be time-consuming and stressful, many people prefer to arrange their plan through a professional debt management company.

Best for: people who are unable to keep up with debt repayments under the existing terms.

However: you must be sure that you will be able to repay your debts within a realistic period of time before you start on a debt management plan. If you can`t be sure, then it might be worth considering an IVA (Individual Voluntary Arrangement), which can allow you to repay as much as you can afford, or even bankruptcy.

You should also consider that if you continue to pay interest on your debts for the duration of your debt management plan, you may end up paying more overall, as you`re paying off your debt more slowly.

Plus, the fact that you are not following your original debt repayment terms will be recorded on your credit history, and this could affect your ability to obtain credit for the next six years.

Debt consolidation loan

A debt consolidation loan is a new loan that enables you to repay your existing debts in one go, effectively `consolidating` those debts into one relatively easy-to-manage monthly payment. After that, instead of repaying several creditors, you will only have to deal with one - making it easier to keep track of your finances.

Many people who take out a debt consolidation loan will spread out their repayments in order to reduce their monthly outgoings. This can make your debt a lot easier to manage, but be aware that because you will be repaying your debt for longer, you may pay more interest than if you had chosen a shorter repayment period.

However, it may still be possible to pay less interest overall if you are consolidating debts with a high interest rate, such as credit cards. This means that more of each repayment will be going towards repaying the money you borrowed, rather than interest.

Best for: people with multiple debts who would like to reduce their outgoings and/or simplify their finances.

However: consider how much a debt consolidation loan would help you before making a decision. If your existing debts are causing you problems, it may well be that the reduction in payments would not be significant enough to really help. If you fail to meet your debt consolidation loan repayments, you could find yourself `back at square one`.

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