What’s the Difference between Debt Management and Debt Consolidation?
If you’re new to the debt management business, you may still be deciding which solutions are best for your clients. Debt management and debt consolidation are two very different financial strategies and application for either should be taken with due diligence.
As with every critical decision, it’s best to brush up on your facts before you commit to one particular approach. Many debt management companies will stick resolutely to one method, without considering the advantages of a more versatile approach. Choosing between debt management and debt consolidation all comes down to understanding the subtle differences.
What Debt Consolidation Options are Available?
Debt consolidation, as the name suggest, involves a one-off payment, where all the debtor’s debts are amalgamated into one loan. In principle, this makes it easier to manage, as they are now only responsible for paying one creditor at a fixed rate. But there are still many debt consolidation pitfalls to consider.
They will still be subjected to high rates of interest (many inflated beyond that of the individual debts) and the time-frame for repayment is often longer. The client may also be tempted to take out more than they owe in a debt consolidation loan, despite the fact they are trying to dig themselves out of a financial hole.
A debt consolidation loan can be taken out in many forms. Using the equity in personal property as collateral is a popular choice, but puts the debtor’s assets at risk. There’s also the option of transferring the debt on multiple credit cards to a singular account, though you need to be aware of the potential impact on your client’s credit score.
What Debt Management Options are Available?
Debt management is a simple strategy devised to help debtors manage their debt in installments. These are implemented by an external company on behalf of the client, in order to make the repayment process easier and less stressful. Third parties, such as your debt management business, can offer a range of options, from Debt Management Plans (DMPs) to Individual Voluntary Arrangements (IVAs). In each scenario, your company works with the client to find the best payment solutions for their particular needs.
Debt management enables fluidity between creditors and clients. Debt management IVAs are traditionally managed over a period of around five years and provide a legally binding contract for both creditor and debtor. Often, a large proportion of debt is written off at the end of a debt management IVA. DMPs are a little less formal and tend to run until the debt has been repaid. While there is no guarantee that interest rates will remain frozen by the creditor during this period, the plan increases flexibility for both parties and changes to it can be discussed throughout.
Debt management solutions can be maintained by bespoke business software, which enables your organisation to keep track of all your clients’ financial records. Bespoke business software remains customisable, so the system can adapt in time with each debt management agreement. This can a great way of avoiding debt consolidation and increased interest rates, because you can efficiently negotiate individual agreements on your client’s behalf.
If you are moving between both debt management IVAs and DMPs, then bespoke business software will enable you to make the switch with minimal fuss. When it comes to debt management, the best businesses find the best solutions to client payment issues. In circumstances where a number of different creditors have proposed a number of different repayment options, optimising your workflow with bespoke business software can save you from any misinterpretations or administrative errors. The needs of the client should always come first and, in a bid to handle multiple agreements efficiently, bespoke business software is certainly a worthwhile investment.