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Don't Get Confused Between Debt Consolidation and Debt Management

If your debt problems have got to the stage where you really need to get to grips with them and find a solution, you've probably started to do some online research to see what your options could be.

Two very common terms you'll come across on a wide variety of sites are debt consolidation and debt management. Unfortunately, many articles on these topics use the terms more or less interchangeably (especially if the articles were written by people from outside the UK), when in reality they are quite different things.

A detailed look at each of the two techniques along with the advantages and pitfalls is the topic for another longer article, but here I'll outline the basics.

Debt Consolidation

This is the process of combining many smaller debts into one larger one, by taking out a loan large enough to pay off all your other debts such as credit cards and so on, leaving you with one single payment to make each month.

The aim is to end up with this repayment being lower than the combined total of all your existing repayments, leaving you with extra money each month and hopefully going quite a way to solving your problems.

It's important to note that consolidation in no way reduces the amount of money you owe, it just restructures your payments to make them more affordable.

Debt Management

This is quite different to consolidation. In effect, you throw your towel into the ring and admit that you simply can't keep on top of your debts. You do this by writing to your creditors explaining the situation, and ask for all interest and charges to be stopped in return for a new fixed repayment schedule that you can afford.

You will need to do this for all of your creditors, who will ask for details of your total debts, and your income and expenditure. With luck, your creditors will agree to the new affordable repayments, leaving you more able to afford everyday life.

The downside to this is that you are effectively defaulting on your credit agreements which will be noted on your credit file making it more difficult to get credit in the future.

You can either do this whole process yourself, or if this seems intimidating a debt charity may be able to guide you through, or a debt management agency will take charge and deal with all your creditors for you (for a fee). The advantage of using an agency, apart from probably being less stressful, is that once the plan is set up you will make one single payment to the agency who will then distribute it among your creditors according to the agreements made on your behalf.

So, as we can see, consolidation and management are two very different strategies for dealing with debt, and beware of taking advice from any web site that seems to confuse the two.

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