If you’re trying to pay off debt, you’ve probably looked into the variety of options that could help. If so, you’ve likely come across debt consolidation programs—and may be wondering what they are.
Debt consolidation programs can help borrowers who may be overwhelmed by debt payments by combining multiple loans into a single payment. Typically these programs are offered by credit counseling organizations. These organizations may offer guidance and financial planning in addition to helping consolidate debt.
A reputable credit counseling organization will likely incorporate guidance to help with managing debts, along with providing educational material, workshops, and other ways to help borrowers work to develop a realistic budget.
A legitimate debt consolidation program should feature counselors who are certified and trained in offering advice on consumer finance issues in order to create a personalized plan, whether it’s to address credit card debt, bad credit, or other needs.
Consolidating debt typically results in a refinanced loan, with a lower or more manageable interest rate and modified repayment terms.
According to the Federal Trade Commission , it is recommended to find a local debt consolidation program offering credit counseling in person.
You may find these accredited, nonprofit programs are offered through channels like credit unions, universities, religious organizations, military bases, and U.S. Cooperative Extension Service branches .
(It’s important to note that everyone’s debt payoff needs differ, so your mileage may vary.)
What Is a Debt Consolidation Program?
Debt consolidation programs can play two roles. For one, they help borrowers combine multiple loans into a single payment, which can make repayment less overwhelming. For another, they act as credit counselors.
With tools for loan repayment strategies and debt management, they can help lower and/or simplify monthly debt payments. These types of programs are usually managed by credit counseling companies.
It’s good to note the difference between debt consolidation programs and an actual loan opened to consolidate debt.
Qualifying consumers can use a debt consolidation loan (typically an unsecured personal loan) to combine multiple debts into a new single loan as well, possibly with a lower interest rate. But there is no counseling offered during the loan application process, and paying down the debt remains entirely the burden of the borrower.
The services outlined above can make a debt consolidation program different from other methods of consolidation or interest reduction, such as a balance transfer for a credit card, or a personal installment loan from a banking institution or lender.
Keep in mind that debt consolidation is also different from debt settlement, which is a process used to settle debts for less than what is owed.
When enrolled in a debt management program, which is one part of a debt consolidation program, a single monthly payment is sent to the credit counseling agency, which then distributes an agreed-upon amount to each credit card or loan company. The goal of the program is to act as an interlocutor for the debt between the borrower and creditor.
While most debt consolidation program companies are nonprofit organizations, nonprofit status does not guarantee services are free, or even affordable.
These organizations can, however, reach out to the lenders on behalf of the borrower to find an affordable repayment plan, which could take shape in the form of waived fees or penalties, lowering interest rates, in exchange for a specific timeline of usually three to five years for the debt(s) to be repaid.
These programs are not loans, which would come from financial institutions. Perhaps most importantly, debt consolidation programs do not make any promises to reduce the amount of debt owed.
Those are debt settlement programs, run by outside companies who negotiate payments with creditors, and can be for-profit, predatory, or may not act in the best interest of the borrower.
A debt management program, on the other hand, could help set borrowers up for future success, when it comes to how to budget and manage money, educating consumers about cutting expenses or ways to increase income in order to gradually eliminate debt.
Pros and Cons of Debt Consolidation Programs
Debt consolidation is typically most beneficial to those struggling with high monthly debt payments. Paying just the minimum balance on debts every month means it could take a long time to pay off the debt, and interest costs could continue to add to the balance. Getting rid of high-interest debts can help make it easier to pay off the principal amount of the loan.
While having a lot of debt is certainly stressful, it’s worth weighing the pros and cons of any debt consolidation program before signing up. Here are some pros and cons to ponder:
• Multiple payments are combined into one payment, likely making it easier to pay on time.
• Credit counseling could help a borrower get back on track with tools like budgeting and other financial advice.
• Some programs can help negotiate lower interest rates, fees, possibly creating a more affordable payback plan. (Note: Because lowering interest rates may extend the amount of time borrowers would pay their debt off, they may end up spending more on interest in the long run.)
• Debt consolidation programs do not reduce the principal amount of debt owed.
• Can easily be confused for more predatory programs offered by some debt consolidation settlement companies.
• Some programs might charge fees.
Many of the legitimate counseling companies tend to follow a similar setup process, which typically includes an interview with a counselor to go over things like income, expenses, and current bills and loans. The counselor might suggest areas where spending could be reduced and offer educational materials.
The program may also help set up a budget and will send the proposal out to creditors to agree to any new monthly payments, fees, payment schedules, interest rates or other factors, Reputable programs should only charge for set-up and a monthly fee.
It is generally recommended to take extra care with any for-profit organizations requiring a lot of upfront fees, memberships, or fees for each creditor they work with on negotiation.
There is no magic pill to reduce debt, so spending less and budgeting more have been key pillars of a healthy financial foundation.
No company should promise a quick turnaround for becoming debt-free overnight. Historically, credit repair has been a market tainted by fraud, so it’s recommended to tread carefully and do the research before signing on to any program.
Selecting a Debt Consolidation Program
One common and simple way to sign up for this type of debt management program is to contact a reputable nonprofit credit counseling agency. The U.S. Department of Justice offers a list of approved credit counseling agencies by state.
Along with ensuring the agency you’re considering is on this list, you may want to consider doing further research by asking your state attorney general and checking local consumer protection agency websites.
Debt settlement companies often try to sell themselves as the same service, so be wary and check to be sure the organization is offering financial counseling and not making promises to reduce the amount of debt owed.
Based on the interview and assessment of current income and debt, the counselor could either recommend a debt management program, or another solution which could be a personal loan, bankruptcy, or some other form of settlement.
The company should not promise any sort of quick fix or short-term solutions.
The National Foundation for Credit Counseling is responsible for certifying many of these counselors, who must complete a comprehensive training program certifying them to help and educate consumers regarding their finances.
Because most nonprofits are certified, it helps to read consumer reviews of these programs as well, to see how the company operates.
The next step is to check what services are offered and what fees will be charged, such as an initial sign-up fee and recurring monthly fee. Understanding the costs upfront is important, and can help someone avoid a possibly predatory, for-profit business.
Something else you may think to look out for: A settlement company may charge more fees initially on the promise to arrange a reduced lump sum payment of debts.
These companies often instruct consumers to stop making payments entirely on their debt, which could affect credit rating and even may cause the creditor to send the debt to a collection agency. A legitimate program should offer financial advice and counseling on ways to help reduce debt.
Paying Off Debt Independently
Rather than looking into a debt consolidation program to alleviate unwieldy monthly payments, one alternative worth considering is an unsecured personal loan, which could help reduce the overall amount of interest payments and possibly save money on interest in the long run.
While a personal loan doesn’t normally come with the counseling services offered by some consolidation programs, SoFi members also get access to complimentary appointments with SoFi Financial Planners.
This service for SoFi members can cover some of the ground offered by the certified debt counselors under the debt consolidation programs, with an initial call to talk about goals and personal finances.
The SoFi Financial Planner may cover things with members like take-home pay, monthly budgets and spending, loans and debt, and savings, and come up with some next steps.
By consolidating high-interest debt into one lower-interest personal loan, borrowers might find having a fixed monthly payment is a simpler way for them to manage debt. For someone interested in debt consolidation, SoFi personal loans offer various term lengths, and come without fees—unlike many debt consolidation programs.
Consolidating your debt with a personal loan can potentially allow you to pay off your debt at a lower interest rate. An unsecured personal loan could make it easier to focus on just paying down the one loan, with a single monthly payment at a fixed rate and payment amount.
Financial wellness can start with having a plan to be debt-free, and debt consolidation, whether through a certified program or a personal loan, can be one place to start.
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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s