If you’re drowning in debt, you might be feeling a sense of helplessness. You’re not alone. U.S. households carry an average of $110,095 in debt, according to data from the Federal Reserve and U.S. Census Bureau.
Your borrowing options are probably limited because of how much debt you have, and your credit is likely suffering.
At this point, the only thing that’s going to help you get back on your feet is to start tackling your debt. To help you determine the right strategy, we’re comparing two popular options: a debt consolidation loan and a debt management plan.
Find out which approach is right for you based on how much debt you have, the type of debt you have, and your credit situation.
Debt consolidation loan
Debt consolidation can help you roll several debts into one, preferably with a lower interest rate.
There are several loans you can use to consolidate debt, including a personal loan, balance transfer credit card, or home equity loan. Here are a few pros and cons of this approach.
Pros of a debt consolidation loan
- You can consolidate just about any type of debt.
- You might qualify for a better interest rate, which can help you save money.
- You’ll have one payment to remember instead of several.
- You can borrow money while you’re paying down your debt.
Cons of a debt consolidation loan
- If your credit is bad or fair, you might not qualify. If you do, your interest rate might be high.
- If you continue to borrow while you’re paying off your loan, you could dig yourself into a deeper hole.
- You might be on the hook for loan origination fees or balance transfer fees.
Debt management plan
Like a debt consolidation loan, a debt management plan can help you consolidate your debt into one monthly payment, preferably with a lower interest rate.
But instead of paying your new creditor, you make your payments to a debt counseling agency, which sends the money to your creditors.
“A debt management plan can typically include most forms of unsecured debt, such as credit cards and small balance loans,” said Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “But it excludes collateralized loans like mortgages and auto financing.”
Debt management plans typically take three to five years to complete, and you’re usually not allowed to borrow more money until you’re done. In fact, your creditors might suspend or even close your accounts so you can’t use the credit cards or lines of credit you currently have.
Pros of a debt management plan
- It offers forced discipline to help you avoid borrowing more money while you’re paying off your existing debt.
- There’s no special credit requirement because you’re not applying for a loan.
- You have just one payment instead of several.
- You might get a reduction of your interest rates.
Cons of a debt management plan
- You’re required to include all your debts in your plan, not just the ones that are giving you trouble.
- It could hurt your chances of getting approved for credit or an apartment because it signifies that you’ve had financial difficulties.
- Creditors might report that you’re not paying as originally agreed, which could damage your credit score.
- You’re limited on which debts you can include.
Debt consolidation vs. debt management: Which Is right for you?
There’s no best approach to paying down debt. What’s important is that you consider each strategy carefully to determine which is better for your situation.
“A debt consolidation loan may be a better option for someone with a high credit score and a modest amount of debt,” said McClary. “Debt management plans are most appropriate for those who are in danger of falling behind on their creditor payments due to debt balances that have grown beyond the point where they are under control.”
Whichever option you choose, it’s critical to address the real issue at hand: why you got into debt in the first place and whether it will happen again.
Take an honest look at how you got to this point and take steps to ensure you don’t repeat your mistakes. For example, if your credit card spending spiraled out of control, consider getting rid of your credit cards or requesting a lower credit limit to avoid the temptation to overspend.
If you fell into debt slowly because you didn’t keep track of where your money was going, consider creating a monthly budget and sticking to it to develop more spending discipline.
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB) or Turnstile Capital Management, LLC (TCM), which are not affiliated entities. Certain restrictions and limitations may apply. Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. All loan products may not be available in certain jurisdictions. Other terms and conditions apply. Ascent is a federally registered trademark of TCM and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.69% – 10.94%1||Undergraduate, Graduate, and Parents||Visit CollegeAve|
|3.82% – 12.82%3||Undergraduate and Graduate||Visit Ascent|
|4.34% – 12.99%2||Undergraduate and Graduate||Visit Discover|
|4.12% – 10.98%*,4||Undergraduate and Graduate||Visit SallieMae|
|5.03% – 11.23%5||Undergraduate and Graduate||Visit PNC|
|3.88% – 12.88%6||Undergraduate and Graduate||Visit SunTrust|
|4.72% – 9.81%7||Undergraduate and Graduate||Visit LendKey|
|3.72% – 9.68%8||Undergraduate, Graduate, and Parents||Visit CommonBond|
|4.04% – 12.01%9||Undergraduate, Graduate, and Parents||Visit Citizens|