Consolidation Loan vs Debt Management Plan

If you have creditors chasing you for unpaid debts, or you’re afraid that you soon will, now is the best time to take control of your financial situation. Debt consolidation and debt management plans are two potential solutions to financial stress.

Understanding the differences between these options will help you decide which (if either) is right for you. Both approaches can help you pay off debt more quickly and save you money.

Debt Consolidation

Put simply, debt consolidation is the act of combining two or more debt accounts into one. This is done by taking out one large loan and using the money to pay off several other forms of debt, such as personal loans and multiple credit cards. The lender is typically a bank, credit union or online loan company.

Depending on the amount of credit loaned, the expected payoff time is two to five years. You can apply for a personal loan, or incorporate the debt into a home loan (by either taking out a new mortgage or refinancing your current home loan). In a debt consolidation loan, you are responsible for making your monthly repayment directly to the creditor.

Debt Management Plan

A Debt Management Plan (DMP) is a program in which you sign up with a credit counselling company to take over your payments to creditors. You make a monthly payment to the company, who uses that money to make payments to each of your creditors in an agreed-upon schedule.

The credit counselling company should attempt to negotiate better terms on your behalf, such as lowering interest fees and relaxing fees. As with debt consolidation loans, DMPs generally have a three to five year term.

Debt Consolidation, Debt Management Plan or Neither?

Which, if either, of these options are the best for you? The answer is, it depends on your circumstances. Here are some reasons why you would choose debt consolidation:

  • You want to cut the number of payments you’re juggling
  • You want to maintain access to credit while paying down debt
  • You have a good or excellent credit rating to qualify for the lowest interest rates on a personal loan

However, debt consolidation requires you to be disciplined to not accrue further debt, and failure to make payments on time will result in late fees and possibly default.

Alternatively, some reasons to choose a DMP include:

  • Your debt is primarily credit cards
  • You have more debt than you can reasonably consolidate
  • Your credit score doesn’t qualify you for the debt consolidation loan you want
  • You want the external discipline the plan imposes, which prevents you from adding to your debt

A DMP will incur an enrolment fee and monthly fees for their service, and your credit could be damaged if the company doesn’t make timely repayments to your creditors.

If you are struggling in such a way that you are unable to get your debts under control by yourself, seeking outside debt help in the form of debt consolidation or a DMP can assist you in repaying your debts.


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