The One Thing You Need to Know About Debt Consolidation Programs

debt consolidation programs

Debt consolidation programs.

At first glance, this phrase can sound so magical — a tool that will put all your debt in one place and make it suddenly seem manageable.

But do these programs always do what you think they will? Unfortunately, not always. Here’s the one thing you need to know about debt consolidation programs before you decide if this is the right path for you.

Debt consolidation programs do not equal debt consolidation loans

Typical usage of the word “debt consolidation” refers to the act of taking out a loan to pay off one or more debt. This can also be done with a balance transfer credit card. By consolidating one or more debt accounts into a new one, you can streamline your payoff and hopefully achieve lower interest rates. Lower interest rates mean more of your money can go to the balance and help you get out of debt faster. (You can even use this calculator to see how much a lower interest rate can save you.)

So, what about debt consolidation programs? They are not the same thing as debt consolidation loans.

Companies and non-profit organizations offer debt consolidation programs, advertising services such as “debt consolidation” or “debt relief,” among others. But if you enter into one of their debt consolidation programs, what you’re getting involved in is one of two things: a debt management plan or debt settlement.

Here’s how these two things differ and what you need to know about them.

Debt settlement

When you talk to a company about debt consolidation programs, they might bring up the idea of settling your debt for less than you owe.

This can be risky.

When you enroll in a debt settlement program, the debt relief company you work with will try to negotiate with your creditors to settle for less than you owe. The company may have you make your monthly payments to them, which they’ll place in an escrow account. That money will build up to be your eventual debt settlement fund.

In the meantime, a lot is going on with your account:

  • Your account will be in default status.
  • The default status will start damaging your credit score.
  • Debt collectors might call you, even though you’re in a debt settlement program.
  • You can get sued for collection on that debt before you get a chance to settle.

Finally, if the settlement does go through, it’ll be considered taxable income. Be prepared for that bill when tax season hits.

Debt management plans

Another option they might present you with is to enroll in a debt management plan (DMP).

A DMP involves paying someone else to help you manage your debt. You tell them which debt accounts you want to include in the plan, and they negotiate with your creditors to lower your fees and interest rates. Once the negotiation is complete, the debt accounts you include are officially closed, and you make one monthly payment to your DMP representative.

To enroll in a DMP, experts advise first talking to a credit counselor who can review your financial situation and help you see if this is right for you. You can find reputable credit counselors using this state-by-state list of approved credit counselors from the Department of Justice.

If you do enroll in a DMP — whether with the help of a credit counselor or not — it’s important to track the payments on your accounts. Even though your accounts are closed and you’re paying someone else to manage them, you should still make sure they’re making all of your payments on time.

And on that note, be aware that if you miss even one payment yourself, you could be kicked off of your DMP. So before you sign up, evaluate the affordability of the entirety of your plan and make sure you can handle it. Finding out you can’t too late in the game could have consequences for your plan and your credit score.

Things to keep in mind about debt consolidation programs

Whether you opt for a DMP or debt settlement, it’s important to do some homework before you choose a company to work with. Here’s what you should keep in mind.

Finding a reputable company to work with is the most important part

If your credit counselor can’t directly place you in a DMP and sends you to another company, check the reviews before you enroll. It can also help to see if the company is part of a larger organization, such as the National Foundation for Credit Counseling (NFCC). The NFCC requires member companies to follow a specific set of rules to maintain their certification with it.

According to the Federal Trade Commission (FTC), you can even consult with your state attorney general’s office and whatever consumer protection agency is local to you. You can also do a check with the Better Business Bureau or do a Google search with the company’s name followed by “review.”

And don’t forget to look for red flags in your research. These include charging upfront fees, trying to get clients to pay a “voluntary contribution,” telling clients they can stop debt collection calls and lawsuits, and more. Refer to this full list from the FTC before enrolling.

You will pay a fee, but it shouldn’t be the first thing you do

If you decide to work with a non-profit, that doesn’t always mean the service is free for you. You could still be charged a fee, although it’s illegal for any debt relief company or nonprofit to do so upfront.

Here’s a warning from the FTC: “Be aware that ‘non-profit’ status doesn’t guarantee that services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which they may hide, or urge their clients to make ‘voluntary’ contributions that can cause more debt.”

Remember that part of the process in a debt settlement or debt management plan will involve negotiating with your creditors. But you shouldn’t be charged for the service until the negotiation is complete and you have the results in writing from your creditors.

As for how much this will cost you, that depends on who you work with. The Department of Justice deems $50 or less to be a reasonable fee for credit counseling — with anything higher requiring their approval. They must disclose the fees at the beginning of the session.

If you have good credit, a debt consolidation loan might be better for you

While debt consolidation programs can be beneficial, if you have good credit, a debt consolidation loan might be a better choice.

With a debt consolidation loan, you can simply bundle your debt together into a single loan without having to pay a company to manage the process for you. The only fees you pay will be an origination fee on the loan (if there is one) and the monthly interest fee. Ideally,  the interest rate — and therefore the interest payment — would be lower than what you’re currently paying.

And if you’re afraid of going deeper into debt, consider closing the accounts that the debt consolidation loan paid off. That way you can avoid the temptation of piling on still more debt.

Use caution with debt consolidation programs

No matter what type of debt consolidation program you use — debt settlement or debt management plans — proceed with caution. These programs can be helpful to those in dire financial straits, but they’re not always the best way to consolidate debt.

It can be difficult to find a reputable company to work with, you’ll be locked into the plan for several years, and you’ll have to pay monthly fees for the help you’re getting.

That said, if you’re unable to get a debt consolidation loan, unable to pay off your debt in its current state, and want to avoid bankruptcy, then a debt consolidation program can be a good option if chosen carefully and managed perfectly.

As with all financial products, proceed with caution when evaluating debt consolidation programs, and don’t enroll unless you’re sure this is the right solution for you.

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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

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Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
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  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
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