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.
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.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|