The cons of DMP may make one prefer debt consolidation loan but simply deciding based on this single factor is unwise. You will need to balance both sides more prudently so that you make the right choice considering your financial condition, condition, and needs of your debts and resources to repay.
You must choose a debt consolidation loan with proper consideration of all factors so that whatever decision you make proves to be result driven, effective and affordable in the end. For this, you will need to understand DMP first and then go ahead with your research on other options available.
Features of DMP
DMP or Debt Management Plan can be a productive option if you do not void the new agreement with your creditors that the credit counseling agency made on your behalf by missing a payment or giving up the program midway. This will prohibit you from enjoying the benefits of reduced interest rates and a few fees eliminated.
In addition to that, you will also need to close all your credit card accounts but one that you may retain to use in emergency situations. There are also a few other things to consider such as:
- The interest rates: Ideally, the credit counseling agency will negotiate with your creditors to set a low-interest rate and favorable terms based on your ability to pay. Therefore, credit scores really do not matter when it comes to debt management programs. In fact, you can avail a DMP if you have a credit score around 555. If you have a credit score below that and yours is a hardship case the rate of interest can range anywhere from 0% to 6%. Otherwise, the rate of interest for most of the borrowers opting for a debt management program is about 8%.
- The fees: Typically, DMPs will charge a monthly fee ranging from $30 to $55 with an additional fee for the setup that may be up to $75. However, all will depend on the debt and the percentage of your payment.
- The effects on credit: Ideally in a debt management program you will be asked to stop using all your credits cards except one. This will reduce your available credit and will impact your credit score negatively. However, once you start paying your debts it will bring down the outstanding balance eventually improving your credit score.
Therefore, following a debt management program for at least three to five years will need a lot of planning and sacrifices as well in most of the times.
Features of debt consolidation loan
On the other hand, a debt consolidation loan has its specific features and attributes that are entirely different from the debt management plans.
- Typically, a debt consolidation loan involves a large amount especially on a lower rate of interest as well making it more affordable for the borrowers to repay the reduced monthly installments.
- You can use this money to repay a number of unsecured loans such as your multiple credit card debts.
- You can avail this loan from a traditional bank, any online sources that provide debt relief such as Nationaldebtreliefprograms.comor a credit union.
- These loans are usually offered for a minimum of 2 and a maximum of 5 years.
There are lots of advantages and drawbacks of a debt consolidation loan as well. As for the advantages it includes:
- You will have enough money to pay off all your debts
- The rate of interest on these loans will be far lower than the current interest rates on your credit cards and
- It reduces the number of debts and therefore makes monitoring and managing your debts easy and effective now that you have only a single creditor to repay every month with a lower amount.
As for its downsides it includes:
- The total amount of debt is either the same or maybe even more but will certainly not be reduced
- Though it tolls your debts into one payment the problem may still continue if the credit lines stay open and active
- You will have to manage your debts and arrange your payments on your own and
- If you fail to make payments on time it may fetch late fees and possible default.
As for its other features of a debt consolidation loan, you must know that banks, credit unions, and even the online money lenders rely profoundly on your credit scores while determining your eligibility for such loans.
- If you have a credit score of 650 and above you can get high amounts of the loan at a lower rate of interest.
- If your credit score is under 650 then the rate of interest may jump off to double digits while the loan amount remaining the same provided you manage to get a loan in the first place.
- With credit scores below 580, you will need to look for other alternatives as you will not be granted such a loan then.
When you consider and compare the fees charged by the money lenders while making a debt consolidation loan you will find that it includes, origination fee, late fees, check processing fee and even insufficient funds fee.
However, when you consider the effect of a debt consolidation loan on your credit score, it is the same as adding another line of credit.
If you seriously want to improve your credit score and history, you will, however, have to make your payments always on time at least six months. This will also improve your credit mix and credit utilization which will further act as a positive for your credit score.
The requirements
As for the requirements to avail a debt consolidation loan, you will need a proof of income to prove that you have the financial ability to take on this loan. You will also need a good payment history that the creditors will look into to determine your loan amount and rate of interest on the same. If you want to take out a larger loan then you must have high home equity that the lenders may wan as collateral to make the loan and eliminate the financial risks due to non-payments.
