Debt Consolidation vs. Debt Management: Which Option is Best?

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Updated on Friday, November 2, 2018

getting out of debt

Two strategies consumers can pursue to ease their financial burden are debt consolidation and debt management. These options can provide much-needed relief in different ways.

In this guide, we’ll take a look at how debt consolidation and debt management work, which may be best for you and the steps to take should you decide to pursue one of these strategies.

Debt consolidation vs. debt management

 Debt consolidationDebt management

What is it?

A debt relief option that involves paying off existing debt with a new loan or credit card.

A debt repayment program arranged by a credit counselor.


The cost varies depending on how the debt is consolidated.

Typically $25-$35 per month while enrolled in the program.

When is it useful?

  • To pay off multiple high-interest debts

  • To relieve the burden of managing several payments

  • To get and stay current on your bills

  • To get help with managing your finances long term

Who may it be best for?

  • If you have a high credit score and would qualify for a low interest rate

  • If you have a decent handle on your finances

  • If you have a low credit score

  • If you are repeatedly getting hit with late fees

Do you have to close your accounts?


Yes. Debts enrolled in a debt management program usually need to be closed. (In some cases, an exception may be made.)

How long does it last?

The consolidation itself can be immediate. The amount of time it takes to pay off the new debt depends on the terms of the new loan or credit card.

Typically 4-5 years.

Can you do it on your own?


No. It’s set up through credit counseling agencies.

What is debt consolidation?

The core concept of debt consolidation is a basic one: A consumer takes their multiple debts and combines them with a single loan or credit card, typically one at a lower interest rate than the individual debts.

Consolidating debts can also streamline your finances and make things easier to manage. Although Andrew Pizor, a staff attorney at National Consumer Law Center, said having one payment versus multiple payments is not by itself, a reason to pursue debt consolidation.

Rather, debt consolidation can help provide some relief from high payments. “One of the things people like about debt consolidation is that it frequently makes your total monthly payments smaller. And that can be important for an immediate need,” he said.

Keep in mind that consolidating debt into a new loan does not change the total amount of debt owed.

How does it work?

Multiple types of debt can be included in debt consolidation:

  • Credit cards
  • Student loans
  • Unsecured personal loans
  • Business debt
  • Medical bills
  • Debts in collections
  • Taxes

Consumers can consolidate their debts with these options:

  • Personal loan
  • Credit card balance transfer
  • Home equity loan
  • Home equity line of credit (HELOC)
  • Cash-out refinance on your mortgage
  • 401(k) loan

Who is it useful for?

Debt consolidation is most advantageous for consumers who have high-interest debts but would qualify for a low rate on a new loan or credit card. Those borrowers stand to see a significant drop in their total monthly payments.

This strategy is also best for consumers with a steady income who know they can handle the new payment.

How much does it cost?

There usually is a cost associated with debt consolidation, depending on what approach you use to consolidate the debt. Costs can include a balance transfer fee or annual fee if a credit card is used or an origination fee or points if a loan is used.

You can compare lenders using this personal loan tool from LendingTree. After putting in personal information and what you need out of a loan, you’ll see loan offers you qualify for. That could help you find lenders with low or no fees, making this a more affordable option. Note that MagnifyMoney is owned by LendingTree.

How long does it last?

Once the new loan is secured, consumers can pay off their existing debts immediately. The amount of time it will take to pay off the new debt depends on the terms of the loan, the amount of debt consolidated, and the size of your payments.

If you use a personal loan to consolidate debt, your consolidation will last the term of the loan unless you choose to pay it off early. On the other hand, if you use a credit card and only make the minimum payments, you could be paying for an extended amount of time.

When should you use it?

Debt consolidation can be an effective strategy to reduce the amount of interest you’re paying so that more of your loan balance is paid off each month, helping you eliminate your debt faster. It can also help simplify and streamline your payments. But again, that should not be the primary motivator for pursuing this option.

What to watch out for

While there are benefits to pursuing debt consolidation, it does come with some drawbacks. Here are some things to watch out for.

  • Increasing the amount of interest paid. It is possible to increase the amount of interest you pay if you consolidate debts that have no or low interest into a loan with a higher rate.
  • Reducing your payment by extending the term of your debt. If your monthly payment is lower because the new loan has a longer term than the existing debts, then ultimately, more interest will be paid with the new loan.
  • Jeopardizing your home. Consolidating unsecured debt such as credit card and medical bills with a home equity loan or HELOC puts your home at risk if you have trouble paying the new loan.
  • Increasing your debt. Since you’ll be freeing up the balances on your existing debt and increasing the amount of credit available to you, there is potential you may go deeper into debt.
  • Losing protection on federal student loans. If you choose to consolidate federal student loans, you will lose any rights and hardship options associated with them.

What is debt management?

Another debt relief option consumers have at their disposal is to enter a debt management plan. A debt management plan is an organized program offered by credit counseling agencies that helps consumers get and stay current on their bills.

“[One of] the differences between a debt management plan and paying your creditors yourself is the creditors will work with the credit counseling agency,” Pizor said. “They’ll see that you’re trying to pay your bills and you’re getting assistance. So a lot of times, they’ll give some concessions. They might lower the interest rate or lift some penalty fees.”

How does it work?

A credit counselor will work with you one-on-one to determine if you are a good candidate for a debt management plan. They will help you assess your current obligations, establish a budget and figure out a monthly amount that you can set aside for debt repayment. The credit counselor will also communicate with your creditors on your behalf to determine the payment plan.

Debt management does not consolidate the actual debts or reduce the balance owed, but it does combine your payments. Instead of paying your creditors directly, you would deposit the monthly amount into a dedicated account, from which the credit counselor pays your creditors.

You are typically required to close any accounts that you enter into the debt management plan since the goal is to prevent you from getting into further problems.

Who is it useful for?

Debt management can be a good option for a consumer who is struggling to stay on top of their payments. If you are repeatedly hit with multiple late payments each month and can’t seem to organize yourself, debt management can help prevent future late payments and fees and get you back on track with your debts.

You do need a steady income when on a debt management plan as you are agreeing to make consistent and regular payments.

How much does it cost?

Consumers on debt management plans usually have to pay a monthly fee while enrolled in the program. For credit counseling agencies associated with the National Foundation for Credit Counseling (NFCC), the typical monthly charge is $25 to $35.

How long does it last?

The average length of a debt management plan is about four to five years depending on how many debts are enrolled in the program.

When should you use it?

A debt management plan is an excellent path to take if you are so overwhelmed by your finances that you are mismanaging them or doing nothing about your situation. Additionally, if you have a low credit score and may not qualify for a low-interest loan or credit card, it could be a good option for you.

Pizor said the education that comes along with being on a debt management plan could be very advantageous. “A debt management plan is worth considering mainly because you have to go through credit counseling first, and it will help get your budget in line,” he said.

What to watch out for

When you are considering a debt management plan, keep the following in mind:

  • Beware of scams or companies that are in it primarily for the profit: Both nonprofit and for-profit companies offer debt management plans, but in each group, some companies push clients into those programs because of the income it generates.
  • Consider the monthly fee: Keep in mind that you will pay a monthly fee the entire time you are enrolled in the program. A monthly payment of $25 over the average term of five years, is $1,500. Have it make sense for you to pay for this service.
  • There is a chance you may not complete the program: Many participants drop out of debt management plans before finishing it.

Should you use debt consolidation or a debt management plan?

While both of these strategies can provide relief from financial strain, they do so in different ways. To determine which is the best path for you, consider what you ultimately hope to achieve.

If your goal is mainly to reduce the amount of interest you are paying so that you can pay your debt off faster, or to achieve some immediate relief, then a debt consolidation loan could be a good option.

On the other hand, if you’re looking for long-term assistance with managing your finances because you struggle to do so on your own, entering a debt management plan could be beneficial.

As you weigh your options, consider not only the monthly payment, but also the fees involved, the interest you’ll be paying and the length of the new loan or plan. Think about what will help you immediately and long term.

If you decide you want to pursue one of these strategies, take the following steps.

Pursuing a debt management plan

  1. Find a credit counselor that offers debt management plans: Pizor advised that consumers do their homework before deciding to work with any one credit counseling agency. Some sources to find a credit counselor include:
  2. Review the terms of the plan: The counselor should explain the details of the program. Make sure you understand them thoroughly before agreeing to move forward.

Pursuing debt consolidation

  1. Look into your loan options: Research the various ways to consolidate your debt. Start by reviewing the products your existing bank has available, but also take a look at credit unions, community banks and online lenders.
  2. Get preapproved: In some cases, you can get preapproved in minutes online.
  3. Compare terms and select your new loan: Review the rates and fees of multiple loan options and credit cards. To get the most accurate side-by-side comparison, examine the APR of each loan. Choose the option with the best terms and with a payment you are sure you can afford.

Make sure the solution works for you

Pizor stressed the importance of understanding your current situation before choosing an option. And make sure that the cost of the new solution is manageable. “You really have to be careful about it,” he said. “Make sure you’re not paying more than you can afford.”

There is no one-size-fits-all solution for easing financial pressure. Review the details of each of these options carefully and weigh the pros and cons so you can determine the best course of action for you.

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