|
Written by Martin Sumner
|
|
Tuesday, 10 October 2006 |
|
Word Count: 621 Debt Consolidation or Debt Management?
The number of people facing serious debt problems continues to rise
inexorably, with recent research suggesting up to a million Britons could
potentially be in genuine danger of bankruptcy. The situation will only get
worse if, as predicted, the Bank of England starts to increase interest rates
from their current historic lows, leading to higher mortgage payments having to
be made from already overstretched budgets.
If you're one of the many thousands facing real problems in meeting your
repayments, you've probably been looking for ways out of your predicament, and
you'll probably have come across sites advertising debt consolidation and debt
management as possible solutions. What's the difference, and which one is right
for you?
Debt consolidation is the simplest and most straightforward way of dealing with
debt. The basic idea is that you take out another loan which is large enough to
pay off all your current debts such as credit cards, personal loans, overdrafts
and the like. This leaves you with one single monthly repayment to make, which
is already a great step forward in making your finances easier to control.
By making sure that the loan you take out is at a comparatively low interest
rate, you should find that your total monthly repayment is lower than it was
when you were servicing many smaller, more expensive debts. Also, choosing a
longer term to repay your new loan will lower the costs even more.
This sounds perfect in theory, but consolidation isn't without its problems.
Firstly, you're not actually reducing your debt, just your monthly repayments.
While this may take the pressure off in the short term, in the long term you're
likely to be paying more interest overall as you'll be taking longer to clear
the debt. You're also usually shifting unsecured debt onto a secured loan, which
could put your home at risk if you start to struggle with your repayments.
Debt management is an altogether different and more drastic way of tackling your
debt. By entering into a management program, you're handing over the day to day
management of your debt to a company who specializes in negotiating with
people's creditors. This debt management company will contact everyone you owe
money to, and try to negotiate lower repayments by rescheduling your debt,
freezing interest, or even canceling past charges and fees.
You'll still be responsible for repaying much of the debt of course, but in many
cases large amounts of your debt can be wiped out almost overnight. There's also
the advantage that you only have to make one repayment a month, direct to the
management company, who will then distribute it among your creditors.
Entering into debt management can be a very effective way to reduce your debt
and all but eliminate the stresses it causes, but there's also a pretty major
problem with it. You'll effectively be breaking the credit agreements you
signed, which will severely harm your credit rating for the future. However,
once bitten by debt, you might not be too concerned about having problems taking
out more credit in the future.
So which is right for you? Consolidation is a popular 'quick fix' and can
simplify your finances considerably, at the expense of more interest being paid
in the long term, and is a good choice for people who are struggling with their
debt to a moderate level. Management is a more drastic solution, and should only
be considered by people who really have little alternative, and who are unable
to get a consolidation loan because of their credit ratings.
About the author: Martin Sumner is a writer for Debtsorter UK,
http://www.debtsorter.co.uk
|
