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Debt Management or Debt Consolidation, which is best?

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Debt Management or Debt Consolidation, which is best?

In this article we will look at the differences between debt management and debt consolidation.

We will look at the pros and cons of each of the two options and how you can use either one to your advantage when dealing with financial issues, how they will impact your credit scores and credit ratings in the long term.

If you are finding it a strain to manage your finances and feel like the burden of debt weighing down on your shoulders from the assortment of debts ranging from credit cards, shop credit, overdrafts, payday loans, short-term loans, car loans or mortgages you may be looking for a way to make the repayments easier to manage so you can take back control of those finances and make your monthly repayments more affordable.

When looking at your finances it is important to be able to see how your funds will be able to see you through the next 12 months. How are your savings? Are you adding to them each month? How is your job, is it secure? Do you have alternative sources of income other than your daily 9-to-5?

The easy way to figure this out is using this simple formula

If outgoings per month are greater than your income each month then you are heading towards the financial rocks. Or simply

Income < Outgoings = Bad

If on the other hand:

Income > Outgoings = Good 

Keep track of all your finances. Do not allow anything to go unnoticed, even the odd £10 here and there will add up to a significant amount at the end of the year and added up over a lifetime it can be really something special.

When you want to consolidate all of your debts like credit cards, payday loans, overdrafts and any other unsecured debts into one easy manageable monthly payment you may want to consider a debt consolidation loan and a debt management plan.

Both of these two options will involve another party to help you get your finances under control. 

Consolidating your Credit Card Debt:

In simple terms a debt consolidation loan is when you take out a loan that is equal to the sum of all your outstanding credit card, overdraft, payday loans and uses the loan to payoff all of the smaller debts and you are left with one single manageable sum to pay off each month.

Normally the amount that is repaid each month is going to be smaller than the total repayments of all the smaller loans put together.

The added benefit is that you only have to deal with one creditor rather than half a dozen. This in itself is worth taking out a debt consolidation loan. 

Having a debt consolidation loan makes it easier to budget your household bills and other outgoings. One single point of contact.

Take the following as an example:

Let’s say we have 4 credit cards with a monthly repayment of £100 each

So, that’s £400 you need to repay each month.

If you take out a debt consolidation loan to consolidate the 4 credit cards into one payment you will need to consider the following:

  1. What will the new monthly repayments be?
  2. For how long you will need to repay?
  3. Can you repay earlier or overpay without facing any penalties?
  4. What is the interest rate set to and is it fixed for the term of the loan?

Interest rates on debt consolidation loans are normally lower than those found on credit cards, so you have that saving already as these debt consolidation loans generally have lower interest rates. 

In the most basic terms, you are taking out one larger loan to pay off lots of smaller loans. It will in most cases work out a lot cheaper than have lots of smaller loans all taking up time to manage and maintain.

Taking out a debt consolidation loan can be beneficial to your credit score too. Since you will be paying off all of your smaller loans, having just one loans outstanding looks better on your credit report.

Speak to your local bank about getting a debt consolidation loan they would be more than happy to help you out.  Although you must also appreciate that not everyone will be accepted for a debt consolidation loan, it all depends on the creditor you speak to and your individual circumstances.

Getting to the Root of the problem

As you are working your way out of debt you will need to at some point pause and reflect how you managed to find yourself in that situation.

If spending on the credit card is too much of a temptation either leave your credit cards at home when you go out or better still cut them in half but not cancel the account.

The last option is that once you have paid off the credit card balance using the debt consolidation loan to just close the credit card account and be done with it.

Unless you can identify the reasons, you found yourself in debt you may be at risk of repeating it.

Debt Management Plan to Consolidate Unsecured loans:

 A debt management plan is when you work with a debt management service. They will sit with you and go through every single one of your debts in detail.

You will list every single outgoing no matter how small on a detailed income and expenditure form. This form will list all of your monthly bills, rent or mortgage, utilities, council tax, insurance, TV licence, food etc.

Once all of your monthly outgoings have been added up all of your income is then listed. Such as wages, benefits you might receive, tax credits.

When all the income and outgoings have been listed the debt management service will determine how much you are able to afford to pay once all your outgoings have been considered.

They will workout on a pro-rata basis the amount of money that each of creditor will be paid, so the creditor to which you owe the most money will be paid more each month than a creditor with a lower balance.  

Here is a simple break down:

Creditor 1: £1,000

Creditor 2: £2,000

Creditor 3: £5,000

You can afford to devote £200 per month to paying down debts.

An example maybe you owe £10,000 between three (3) creditors and can afford £125 a month:

Creditor A:  £5,000

Creditor B:  £3,000

Creditor C:  £2,000

You can afford to pay £200.

50% goes to Creditor A: £100

30% goes to Creditor B: £60

20% goes to Creditor C: £40

Once the calculations are done they will be sent to the creditors detailing exactly what you can afford and how the payments will be made along with a demand to freeze the account so that it does not incur any further interest or additional charges. This will give you the chance to repay the outstanding debt 

Once all your creditors have agreed to the terms of the new payment structure all you have to do is send £200 to the debt management company who will then pay each of the creditors in turn.

You continue to do this until all the accounts have been repaid in full. This may take a few months or years but at the end you will be debt free.  

The major difference is that going to a debt management service could impact your credit score, but if you are in debt this may be your only course of action to get you out of debt and back out in the clear. In any event at this point your credit rating has taken a beating so what have you to lose? 

Taking equity out of your home to repay unsecured debts.

If you have equity in your home, then it might be worth considering taking the equity out of your property to repay all the outstanding debts. Mortgage interest rates are fairly low and it maybe more economical to take this course of action. 

If you do this, you are taking valuable equity out of your property which could have been used for more productive purposes.

There are a couple of issues with doing this, but it can be an option and solution for some people. The first issue is that you are now taking an unsecured debt and making it a secured debt and you have also increase your mortgage repayments. If you have taken the mortgage out to repay over the spanning over a couple of decades, it might turn out you will pay more for the debt than have you left it were it was.

Both debt consolidation and debt management are options which are available if you are struggling with debts.

Debt management agencies are regulated by The Financial Conduct Authority

Many people in the U.K struggle with debts and many do not know how to start to repay them speaking to a debt advisor is one of the best things you will do along with taking action yourself by speaking directly with your creditors.

https://www.nationaldebtline.org/ and https://www.moneyadviceservice.org.uk

You should always seek professional advice when handling debt problems. Cashute are not licensed debt advisers and any information contained in this article should not be taken as legal advice. It is your Responsibility to seek out correct legal advice

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Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk