Should You Consider a Debt Consolidation Loan in 2025? | CCCS of Rochester
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Should You Consider a Debt Consolidation Loan in 2025?

If you have debt to pay off in the new year, knowing your options for repayment is important to make the right decision. Debt consolidation loans and debt management programs (DMP) are both designed to make it easier to pay off your debt. However, it’s important to consider the differences between the two options and how they might impact you.

 

What Is a Debt Consolidation Loan?

A debt consolidation loan is a loan that you take out on your own to consolidate debt like credit card debts, medical bills, and auto loans into one monthly payment. While a debt consolidation loan can be helpful in simplifying your repayment and help lower your credit utilization (the amount of credit you’re using versus unused), which is good for your credit score, there are some downfalls.

If you don’t get approved for the entire amount you owe, you’ll still have to pay down other accounts in addition to the consolidated loan. Just like any loan, you’re not guaranteed to get it. Lenders will typically check your credit score, income, and debt-to-income ratio. If you have bad credit and get approved, you’ll likely deal with a high interest rate, costing you more over time. 

Finally, if you don’t change your spending habits, you may continue accruing debt, which doesn’t solve the core problem. 

 

How Does a Debt Management Plan Work?

When you enroll in a debt management plan, you’ll work with a certified credit counselor, who will negotiate with your creditors to consolidate your debt into one affordable monthly payment at a reduced interest rate, lowering what you owe over time. Unlike a debt consolidation loan, you’re not taking out a new loan. 

Credit counseling agencies typically charge a small fee (typically around $40) for their services, and you’re expected to refrain from opening up new lines of credit during the repayment period. However, debt management programs are designed to help you pay off your debt in three to five years. Credit counselors will also provide you with other services at no charge, including helping you create a budget, plan for the future, and provide lessons on financial literacy. 

Ultimately, the choice is up to you and what works for you. But while you could end up hurting your credit with a debt consolidation loan, a debt management program is designed to provide continued support as you pay off your debt and address underlying spending habits that may have put you in debt, helping you take control of your financial health.

 

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