Debt Consolidation Programs: Debt Consolidation Loans and More
- UpdatedOct 27, 2024
- A debt consolidation loan is one bigger loan that pays off multiple smaller loans.
- In a debt management plan, you work with a credit counselor to pay off your debts in full. Your payments are bundled and you might get a break on fees and interest charges.
- Debt settlement is when you pay less than the full amount owed, but your creditor accepts it as payment in full, forgiving a portion of your debt.
When we talk about debt consolidation programs, we’re talking about different ways to bring your debt under control. If you’re having trouble paying your bills, a debt consolidation program may be able to help.
What is a debt consolidation program
Debt consolidation is a loan to pay off multiple smaller loans. If you’re finding it hard to keep up but haven’t fallen behind, a debt consolidation program can help you take control of your finances.
Reduces the number of monthly payments
With debt consolidation, you combine multiple payments into a single monthly payment. If your debt is spread across credit cards, personal loans, payday loans, car loans, and so on, it can be easy to miss a payment deadline or feel overwhelmed. With a debt consolidation program, you only have one deadline to remember.
Pays off the debt with a more affordable monthly payment
It’s common for the debt consolidation loan payment to be lower than the total of all the smaller payments you were making, giving you some much-needed breathing room in your budget.
May save you money
Debt consolidation can save you money in different ways. These are installment loans that often have lower interest rates than credit cards. If you pay off an expensive debt, you might save money in interest. Here’s an example.
Let’s say you have $10,000 in debt and you can afford to pay $500 per month.
| Interest rate | Time to payoff | Total interest paid |
|---|---|---|
| 21.99% (credit card) | 25 months | $2,416 |
| 12% (loan) | 22 months | $1,215 |
In this scenario if you keep making the same monthly payments, you'd get out of debt three months sooner and pay half as much interest. Your actual interest rate will depend on your credit standing at the time you apply.
Understand that debt consolidation programs don’t always save you money. If you opt for a lower payment, it might take you longer to pay off the loan. Taking more time to pay will increase the amount of interest you pay.
The top three ways to get out of debt
There are plenty of different paths to getting rid of your debt. Which one is right for you depends on how much debt you have, how much you can afford to pay each month, what your credit score is, and what strategy aligns with your priorities. Here is some info about your options:
Debt consolidation loan
A debt consolidation loan may be the best option if you aren’t behind yet but you need some financial relief, or if you can lower the cost of your debt. Debt consolidation loans are offered by credit unions, banks, peer-to-peer lenders, and online lenders.
The payoff time for a debt consolidation loan typically ranges from 2 to ten years.
Debt management plan
A debt management is a way to pay off your debts in full while you learn how to manage your budget and credit. DMPs are administered by non-profit credit counseling organizations and take 3-5 years to complete. The credit counselor will review your income, expenses, and current debts to help you decide if you’re a good fit for a debt management plan. If so, you’ll make a single payment each month to the agency. They’ll distribute it to your creditors.
Participation by creditors is voluntary. You’ll probably have to close any credit accounts you include in the plan. You won’t be able to include student loans or secured debts like car loans or mortgages. The counselor will reach out to your creditors and try to negotiate lower interest rates and fees to help pay off your debt faster. The National Foundation for Credit Counseling can help you find an accredited agency to work with.
Debt settlement plan
In a debt settlement plan, you negotiate with your creditors to accept less than the full amount you owe. You can do this yourself or you can hire a professional company to help you. If you hire help, you’ll pay a fee.
You don’t have to stop making your payments, but most creditors won't negotiate your debt if your account is current. Debt settlement is generally an option for someone who's already delinquent and genuinely can’t afford to repay their debts.
To negotiate a debt settlement, you typically have to make an offer. That means you need to have money set aside before you call the creditor to negotiate. If you hire a professional company to help you, they will set up a dedicated account for this purpose. You'll make regular payments into this account, and when the balance is big enough, your debt consultant will make the debt settlement offer. The company will take its fee out of the same account.
Debt settlement programs usually last 2-4 years. Learn more about debt settlement here.
How do I choose a debt consolidation program?
The best debt consolidation program is the one you can stick with. If you fall behind or drop out of a debt consolidation program, you might end up even further in debt.
For instance, one big risk of debt consolidation loans is charging your credit cards up again after you pay them off. Then you’ve got twice as much debt and your financial problems are even worse.
Your strategy should include a plan for avoiding more debt in the future, especially while you’re dealing with today’s debts.
Compare monthly payments and choose an affordable one
Perhaps the most important thing to consider when picking a debt consolidation program is how much you can afford to pay each month. If you truly can’t afford to repay your debts, a loan might not be the best option. If you can afford them but you need some budget relief, a loan might be a smart move. If you’ve had a drastic loss of income and you don’t expect it to go back up, consider debt settlement or bankruptcy.
Compare overall cost
Besides the monthly payment, ask how long it will take until you’ll be out of debt and what all of the costs are. Some strategies are designed to lower your overall cost, and some are designed to help you in other ways.
A debt consolidation loan might get you a lower interest rate but you will pay more interest if you take longer to repay the loan. In addition to interest, you may pay an origination fee for the loan.
A debt management plan could get you lower interest rates on your existing debts, but you’ll pay off what you owe in full. There is a small monthly fee for a DMP.
A debt settlement plan could allow you to pay less than the full amount you owe, but if you hire help you’ll pay their fees. The fee is usually a percentage of each settled debt. Also, you might owe taxes on the forgiven amount unless you’re insolvent at the time you settle the debt.
Compare providers
Hundreds of organizations provide debt consolidation programs in online and brick-and-mortar locations. Do your homework the old fashioned way. Be wary of deals that sound too good to be true. Ask lots of questions.
Debt relief stats and trends
We looked at a sample of data from Freedom Debt Relief of people seeking debt relief during September 2024. The data uncovers various trends and statistics about people seeking debt help.
FICO scores and enrolled debt
Curious about the credit scores of those in debt relief? In September 2024, the average FICO score for people enrolling in a debt settlement program was 581, with an average enrolled debt of $24,531. For different age groups, the FICO scores varied. For instance, those aged 51-65 had an average FICO score of 585 and an enrolled debt of $27,303. The 18-25 age group had an average FICO score of 549 and an enrolled debt of $14,301. No matter your age or debt level, it's reassuring to know you're not alone. Taking the step to seek help can lead you towards a brighter financial future.
Collection accounts balances – average debt by selected states.
Collection debt is one example of consumers struggling to pay their bills. According to 2023, data from the Urban Institute, 26% of people had a debt in collection.
In September 2024, 30% of debt relief seekers had a collection balance. The average amount of open collection account debt was $3,203.
Here is a quick look at the top five states by average collection debt balance.
| State | % with collection balance | Avg. collection balance |
|---|---|---|
| District of Columbia | 23 | $4,899 |
| Montana | 24 | $4,481 |
| Kansas | 32 | $4,468 |
| Nevada | 32 | $4,328 |
| Idaho | 27 | $4,305 |
The statistics are based on all debt relief seekers with a collection account balance over $0.
If you’re facing similar challenges, remember you’re not alone. Seeking help is a good first step to managing your debt.
Regain Financial Freedom
Seeking debt relief can be the first step toward financial freedom. Are you struggling with debt? Explore options for debt relief to regain control of your finances. It doesn't matter how old you are or what your FICO score or credit utilization is. Take the first step towards a brighter financial future today.
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Do you need good credit for debt consolidation?
If you want a personal loan for debt consolidation, you’ll need at least a fair credit score (probably 670 or higher). If you own a home, you might be able to get a home equity loan for debt consolidation with a credit score of at least 600. If you have a poor credit score, you might not qualify for a loan and would want to look at a debt management plan or a debt settlement program.
Is there a government debt relief program?
The most common form of government debt relief is bankruptcy. But bankruptcy doesn’t always relieve debt.
If the court thinks you can afford a monthly payment, you may be put into Chapter 13 bankruptcy. You’ll make payments on your enrolled debts for 3-5 years and if any balances remain at the end of your program, they’ll be forgiven. About half of Chapter 13 enrollees do not end up having any debts forgiven.
If the court decides you don’t have enough disposable income for a payment, you’ll be enrolled in Chapter 7 bankruptcy, where all of your enrolled debts are forgiven within a few months. In Chapter 7, if you have assets, you might have to sell them.
For both kinds of bankruptcy, participation is mandatory. That means if a debt qualifies and you want to enroll it, the creditor can’t refuse to participate. Some kinds of debts don’t qualify, like federal student loans in most circumstances.
The other kind of government debt relief is for federal student loans. You can apply for a deferment or a forbearance. In a forbearance, interest will continue to accrue and if you don’t make any payments, you'll owe more at the end of the forbearance than you did before. In a deferment, some types of loans continue to accrue interest, but some don’t.
Should I do a debt snowball or debt consolidation?
A debt snowball eans paying off your debts one at a time, starting with the smallest loan. As each debt is paid off, you might feel more motivated to pay off the next. If you can afford to make your minimum payments and pay extra toward one debt each month, a debt snowball might be right for you. If you’re having trouble making your payments each month, then another strategy might be more appropriate.
Debt Consolidation
Debt Consolidation
