The Differences
Debt consolidation and debt review are two different strategies for managing debt, and each has its own benefits and drawbacks depending on your financial situation. Here is a comparison to help you understand the differences –
Debt Consolidation
Debt consolidation involves combining multiple debts into one loan or payment. The goal is to simplify your finances and potentially reduce interest rates.
How it Works -
- Combining Debts – You take out a new loan or use a financial product (like a balance transfer credit card) to pay off multiple existing debts.
- One Payment – You make a single payment each month, ideally at a lower interest rate.
- Unsecured vs. Secured Loans – Debt consolidation can involve either unsecured loans (like personal loans) or secured loans (like home bonds).
Debt Review - (Debt counseling)
Debt review, also known as debt counseling, is a formal process designed for people who are over-indebted and struggling to meet their debt obligations. This option is usually more aggressive and is often used as a last resort before bankruptcy.
How it Works -
- Debt Assessment – A debt counselor assesses your financial situation to determine if you are over-indebted.
- Negotiation – The debt counselor negotiates with your creditors to reduce interest rates and extend repayment terms.
- Debt Repayment Plan – A new repayment plan is structured, and you make payments to the debt counselor, who distributes the money to your creditors.
Goal
Debt Consolidation
Debt Review
Goal
Simplify payments and potentially reduce interest rates
Restructure debt for individuals who are over-indebted
Eligibilty
Generally for those with a manageable amount of debt.
For individuals struggling to meet debt obligations
Impact on credit
Can be neutral or positive if payments are made on time
Negative impact on credit score during the process
Legal Protection
No formal legal protection from creditors
Offers legal protection against creditor actions
Repayment Flexibility
More flexible, allows you to shop for better terms
Less flexible, follows a strict repayment plan
Debt Reduction
Possible reduction in the total debt amount
Possible reduction in interest rates and lower payments
Time Frame
Usually short to medium-term (depending on loan terms)
Long-term commitment, often several years
Admin Fees
No admin fees applied
Admin fees apply
Which is right for you?
- Debt Consolidation may be better if you have manageable debt, a good credit score, and want to simplify your payments without impacting your credit score.
- Debt Review is more suitable if you’re overwhelmed with debt and need formal assistance to restructure your repayments, even if it affects your credit score.
If you are unsure, consulting a financial advisor or debt counselor like Money and Legal Matters who can help you decide which option is best for your situation.
