Debt management plans and debt consolidation loans [debt elimination solutions]
In my work as a financial counselor, I meet with individuals who are having challenges managing credit card and other unsecured debt. This blog gives a brief overview of two potential solutions to eliminating that debt: a Debt Management Plan (DMP) and debt consolidation loans.
What is a Debt Management Plan or DMP?
It’s an agreement you and your creditors make to pay off your outstanding debts. It combines your various credit card and unsecured loan payments into a single monthly payment. Nonprofit credit counseling agencies, including LSS Financial Counseling, offer DMPs.
How does a DMP work?
You create the plan with one of our certified financial counselors to combine your credit card payments and possibly unsecured loans together into one easy payment. You then make that one payment to us each month, and we send the funds to your creditors. Because you are paying through a nonprofit agency, many creditors will reduce interest rates, stop fees and sometimes lower your payments. Typically, individuals who create a DMP pay off their debts in five years or less when they make on-time payments. This will reduce your overall payoff period and save you a lot of money in interest. As noted, we do charge a small monthly fee for this service; however, the significant interest savings you receive from the lower interest rates more than compensates for that fee.
What are debt consolidation loans?
They are personal loans offered through a bank, credit union or online marketplace to pay off credit card and other unsecured debt. The interest rates on these loans depend on many factors, including your credit score. People with lower credit scores will pay higher interest, and people with higher credit scores will pay lower interest. These rates can fluctuate from 6% to 36%, depending on the lender. Watch our brief video to learn about the pros and cons of debt consolidation loans.
Be cautious with debt consolidation loans
Unfortunately, there are many “bait and switch” lenders out there. They will promise you a low rate, but when the time comes to sign the final paperwork, the rate mysteriously becomes higher. Read all the fine print and do your research.
Lenders are also very cautious in the amount they are willing to lend. The larger the debt consolidation loan, the more likely lenders could require that an item be attached to that loan as collateral (such as a house or car). This means you could you lose your house or car if you didn’t pay off your loan.
Resources and assistance available
We have resources to assist you in your decision. Read more about our DMP and our blog on different types of debt consolidation loans. Plus watch our short video to learn more about the differences between DMPs and debt consolidation loans.
In addition, our trusted, nonjudgmental financial counselors can explore all your options for managing your debt and work with you to find a solution that fits your particular situation. Call 888.577.2227 or get your support online. We are here to offer guidance and support and answer any questions you might have!
Author Joanne Lundberg is a certified financial counselor with LSS Financial Counseling.