When you find yourself burdened by debt and struggling to meet your obligations, unable to keep track of everything, debt consolidation programs may provide relief. However, before signing up for one of these programs, understand how these agreements work and evaluate whether you really need to use them.
What are Debt Consolidation Programs?
A debt consolidation program is typically a service that involves combining multiple loans into one payment. In most cases, the “program” is a service or set of services offered by a credit counseling company or organization: you make a single payment to the company, which then distributes your payments to creditors.
Note: The terms can become confusing. A debt consolidation loan (as opposed to a program) is a new loan you use to pay off other loans. You’re supposed to get a loan with better terms, which makes repayment easier.
They have similar outcomes, although they operate in completely different ways: you make one payment instead of multiple payments. You may get a lower monthly payment than you had before. It might take you longer to pay off the debt. You might secure a lower interest rate in the best-case scenario, although you may end up spending more in interest overall.
Again, the main difference between a debt consolidation loan and a debt consolidation program is that the loan results in transferring debt to a new loan. The program, which we’ll explain below, is a service that helps you pay off your debt wherever it exists. Sometimes these programs are known as debt management plans.
If you have good credit and sufficient income, a debt consolidation loan may be the best option for you. Compare the fees you’ll pay for a loan versus a program, and decide what’s best for you.
How Does It Work?
A debt consolidation program is a service that helps you manage your debt. With the help of a nonprofit credit counseling agency or a for-profit company, you set up a system to eliminate your debt within three to five years.
Starting with a Consultation
The first step in a debt management program is the consultation. You talk with the service provider’s staff to determine whether they can help you or not. It’s a good opportunity to understand your debt and ask questions about the fees and how the organization operates. If you feel uneasy, try another service provider.
You May Have to Pay Fees
Although some nonprofit organizations may waive fees, you might have to pay setup fees and monthly fees. Compare the fees across organizations before choosing one. When you are financially struggling, those dollars matter.
Unsecured Loans Only
Debt consolidation programs pertain only to unsecured debt. In other words, the loan cannot be secured by collateral. For example, mortgage loans and auto loans typically do not qualify. Unsecured debts include loans like credit cards, personal loans, and some student loans.
Keeping Your Accounts
With a debt management program, your loans will remain as they are now – you won’t get a new loan or transfer the debt. However, you might make one monthly payment to your service provider, and the funds will then be distributed to the various creditors. Your service provider communicates with the creditors during the setup process and as the program progresses.
No New Debt
The goal is to eliminate debt, so taking on more debt isn’t part of the deal. You may need to close most of your credit cards and agree not to incur new loans while paying off old debts.
Reducing Payments?
In the best-case scenario, you’ll pay less on your loans each month, but more of that money will go toward reducing the debt. To make that work, your interest rates may be reduced, meaning that less money goes toward interest fees. You might even see penalties fees reduced. Sounds too good to be true? There is a trade-off, of course (not to mention the fees you pay to your service provider).
Its Impact
On Credit
Enrolling in a debt management program should not negatively impact your credit scores. However, the fact that you are in a program may appear on your credit reports. Also, the steps you take as part of the program can positively or negatively affect your credit.
Choosing a Program
There are many companies and organizations looking to help you manage your debt. How do you know which one is the best?
Inquire, read reviews, and research service providers. Start with organizations that have a strong reputation. The National Foundation for Credit Counseling (NFCC), a non-profit organization, certifies counselors and sets specific requirements for member organizations.
Note: The National Foundation for Credit Counseling is a good place to start, but there may be other good options available.
Remember that you may not even need a debt management program: you can accomplish many things yourself. Instead of paying fees, it will take some time and effort – but you may have more time and energy than money right now. Contact your creditors to see if any relief is available. If you have no luck, or if you prefer to seek help from an experienced professional, the next step is to talk to a credit counselor.
If your situation and ability to repay multiple credit cards are more complicated, you should consider seeking assistance from a debt relief program. Arriving at a debt settlement is a last resort as it involves stopping payments and working with a company that holds those funds in escrow while negotiating with creditors to reach a settlement, which can take up to four years. Stopping payments to creditors can significantly impact your credit score.
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Resources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Experian. “How Does a Debt Consolidation Program Work?”
Federal Trade Commission. “Getting Out of Debt.”
Experian. “A Debt Management Plan: Is It Right for You?”
National Foundation for Credit Counseling. “Non Profit Debt Management Plans and Programs.”
Source: https://www.thebalancemoney.com/debt-consolidation-programs-315542
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