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Debt consolidation loans vs. debt management programs: Here's how to choose

Debt management programs and debt consolidation loans are very different debt relief options.  Suriyan Tejasurintr/Getty Images

Debt consolidation loans and debt management programs are two popular debt relief options. And, while these options may sound similar, they're very different from one another. 

Debt consolidation loans are typically personal loans. If you take this route, you'll use your new loan to pay off and consolidate high interest debts. If the new loan's interest rate is lower than the average interest rate on your current debts, you'll save money in the process. These loans also simplify the repayment process since you'll only have to make one monthly payment, rather than multiple monthly debt payments. 

Debt management programs, meantime, rely on expert negotiators to cut your interest rates and act as an intermediary between you and your lenders. And, they simplify the payment process by giving you the ability to send them one monthly payment. When they receive that payment, they'll send payments to your individual lenders. So, how do you choose between the two if you're dealing with debt and want a way out of it?

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Debt consolidation loans vs. debt management programs: Here's how to choose

There's no one-size fits all answer to the question of whether debt consolidation loans or debt management programs are best. But, there are a few questions you can ask yourself to determine which option is right for you.

Do I have a good credit score?

Debt consolidation loans are a lending product. As such, you'll typically only qualify for the best rates and terms if you have a good credit score. A debt management program may be a better form of debt relief for you than a debt consolidation loan. 

"It's important to have a good credit score in order to get a lower interest rate on your consolidated debt," explains Michael Broughton, founder and CEO of the credit-building app, ALTRO.

On the other hand, even if you have a solid credit score, there are a couple more questions you should ask yourself before choosing between these two debt relief options

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Can I comfortably afford my minimum payments?

Your credit score doesn't always paint a perfect picture of your financial situation. After all, even those with good credit may struggle financially from time to time. And, whether or not you're struggling financially should play a role in your decision to choose a debt consolidation loan or debt management program. 

So, ask yourself, "Can I comfortably afford my minimum payments?" If the answer is "no," a debt consolidation loan may not provide enough relief. Instead, consider a debt management program as the negotiators may be able to use your financial hardship details to significantly reduce your monthly payment obligations

Am I capable of avoiding high interest debt in the future?

Regardless of how good your credit score is and whether or not you can afford your minimum payments as they stand, your journey to debt freedom should end with with you being-debt free.

But staying out of debt may be harder than it sounds. 

After all, when you pay your debts off with a debt consolidation loan, you may have newly available credit on your credit cards and other revolving accounts. And, that newly available credit can be easy to tap into. So, before you make your final choice to move forward with a debt management program or a debt consolidation loan, ask yourself one more question: 

"Am I capable of avoiding high interest debt in the future?"

If you know that once you have available credit, you're likely to use it, a debt management program may be the better option. With these programs, your accounts are typically closed following negotiations - cutting your available credit to zero. On the other hand, if you take the debt consolidation loan route, you'll pay off your accounts, but may have a large amount of available credit once you've done so - making it possible to fall back into high interest debt. 

The bottom line

If you're torn between a debt consolidation loan and a debt management program, consider asking yourself the questions above. If you find that you have a good credit score, can comfortably afford your minimum payment and can avoid high interest debt on your own, a debt consolidation loan may be a good fit. On the other hand, if you have a poor credit score or you can't comfortably afford your debt, a debt management program can help. Moreover, even if you have solid credit and can afford your payments, a debt management program may be a good fit if you think you may fall back into debt once your accounts are paid off and more credit becomes available. Chat with an expert about your options now

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