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Debt Consolidation Loans vs Debt Management through Credit Counseling

Written by:
Financial Literacy Specialist

Both options consolidate debt. The best choice depends on your situation.

When high-interest rates make it impossible to pay off debt efficiently, debt consolidation offers a faster, easier way out. You combine multiple bills into one affordable monthly payment at the lowest interest rate possible. Thus, you can get out of debt faster because you’re not wasting money covering interest charges every month.

But there’s more than one way to consolidate. So, which method is the right one for you?

Debt consolidation loans are, by far, the most popular and well-known way to consolidate debt. You take out a low-interest rate personal loan and use the funds to pay off your credit cards and other debts.

On the surface, it sounds like the perfect solution. You can get out of debt on your own, keep your credit cards, and save a bunch of money. When it works, it’s ideal.

However, the reality is that it doesn’t work for most people. There are two reasons why…

2 Reasons Why Consolidation Loans Aren’t for Everyone

A debt consolidation loan only works if you can qualify at a low-interest rate. In general, you need at a rate of 10 percent or less for consolidation to be truly beneficial. Otherwise, the interest rate is not low enough to provide the reduction in payments and costs that you need.

 

Challenges with debt often lead to missed payments and collections, which drag down your credit score. Even simply having high balances that are close to the credit limit of the card can damage your credit. If this has happened, you may find it difficult to find a good loan.

Financial challenges aren’t caused by debt – it’s a symptom, not a cause. Challenges with debt are usually rooted in larger financial issues, such as a lack of savings or an inability to maintain a balanced budget.

Getting a loan doesn’t solve those issues. In fact, it can end up making your situation worse. If you can’t balance your budget or cover emergency expenses with savings, then you’re likely to run up new credit card balances. Then you’ll have new credit card debt on top of the loan to pay off.

Credit counseling offers another way to consolidate

Luckily, debt consolidation loans aren’t the only way to consolidate debt. There’s another solution called a debt management program (DMP).

  • Like a loan, it rolls all your debts into one affordable monthly payment at the lowest interest rate possible.
  • Unlike a loan, you don’t need good credit to qualify for those low rates. And it’s designed to help you achieve real financial stability because it comes with the added benefit of professional support.

You enroll in a DMP through a nonprofit consumer credit counseling service. These organizations exist to assist consumers in getting out of debt. They offer free debt and budget evaluations and advise people on the best way to get out of debt.

If someone can’t get out of debt on their own (i.e. with a loan), but isn’t to the point of filing for bankruptcy, the credit counseling agency offers a happy medium with a DMP.

Instead of qualifying for low-interest rates based on your credit, the agency works with your creditors to reduce or eliminate interest charges. You don’t take out a new loan – you still owe your original creditors. But because you’re going through credit counseling, they agree to minimize your rates.

Here’s a snapshot of how a DMP compares to a traditional debt consolidation loan:

Infographic comparing debt consolidation loans vs debt management programs

No obligation, no upfront costs, no bias

Since credit counseling agencies are nonprofit organizations, they are required to operate with a consumer’s best interest at heart.

In other words, they can’t recommend a debt management program unless it’s the best solution to use in each financial situation. If there’s a better option available, they must tell you what it is, be it a consolidation loan, debt settlement, or bankruptcy.

This means you can get a free evaluation from a certified credit counselor without any strings attached. It’s the easiest way to get an expert opinion on your best option for getting out of debt. You have a clear answer, instead of guessing or hoping that you’re making the right choice.

Request a free debt and evaluation with a certified credit counselor today.

The benefit of professional support

Another advantage that credit counseling offers is that it provides financial education and coaching as you get out of debt. The credit counseling team helps you create a budget, that includes money for saving, so you can start building an emergency fund.

The team also can help you define your financial goals and set action plans for achieving them. You have access to free resources that teach you how to attain good credit or plan for major life events.

This helps solve those underlying challenges you’re facing that caused you to get into debt in the first place. You address the root causes of your debt, so you can move forward and achieve long-term stability.

We’ve been helping people consolidate debt for nearly three decades

Consolidated Credit is one of the nation’s largest nonprofit credit counseling agencies. Since 1993, we’ve provided free credit counseling to over 10 million people. We’ve also helped people consolidate over $9.75 billion in unsecured debt.

Case Study

Eric from Whitier, CA

“I’m very satisfied with the service. The payments are always made on time and the APR reduced significantly! ”

Where he started:
  • Total unsecured debt: $10,525.00
  • Estimated interest charges: $6,188.51
  • Time to payoff: 13 years, 8 months
  • Total monthly payments: $421.00
After DMP enrollment:
  • Average negotiated interest rate: 2.00%
  • Total interest charges: $542.18
  • Time to payoff: 5 years
  • Total monthly payment: $185.00
Time Saved

8 years, 8 months

Monthly Savings

$236.00

Interest Saved

$5,646.33

Case Study

Gerald from Valrico, FL

“Consolidated Credit has been amazing. They made getting out of debt not so painful! Thank you. ”

Where he started:
  • Total unsecured debt: $108,688.00
  • Estimated interest charges: $64,104.03
  • Time to payoff: 18 years
  • Total monthly payments: $4,347.52
After DMP enrollment:
  • Average negotiated interest rate: 5.25%
  • Total interest charges: $11,267.00
  • Time to payoff: 4 years, 8 months
  • Total monthly payment: $2,165.00
Time Saved

13 years, 4 months

Monthly Savings

$2,182.52

Interest Saved

$52,837.03

Case Study

Karee from El Paso, TX

“Paying off my debt has been simple and stress-free from the beginning. Everyone has been very helpful and supportive. I never thought I’d ever be out of debt but in less than a year I will achieve my goal! ”

Where she started:
  • Total unsecured debt: $15,698.00
  • Estimated interest charges: $8,912.28
  • Time to payoff: 11 years, 1 month
  • Total monthly payments: $627.92
After DMP enrollment:
  • Average negotiated interest rate: 5.73%
  • Total interest charges: $2,459.65
  • Time to payoff: 4 years, 10 months
  • Total monthly payment: $303.00
Time Saved

6 years, 3 months

Monthly Savings

$324.92

Interest Saved

$6,453.33

Case Study

Christopher from New York , NY

“Consolidated Credit helped me get out of debt fast. Their customer service reps are very friendly and understanding. Their debt management program is the best. ”

Where he started:
  • Total unsecured debt: $26,505.00
  • Estimated interest charges: $15,396.98
  • Time to payoff: 13 years, 10 months
  • Total monthly payments: $1,060.20
After DMP enrollment:
  • Average negotiated interest rate: 7.50%
  • Total interest charges: $4,592.62
  • Time to payoff: 4 years, 2 months
  • Total monthly payment: $607.00
Time Saved

9 years, 6 months

Monthly Savings

$677.48

Interest Saved

$16,901.60

Get on the road to becoming debt-free today. Talk to a certified credit counselor to get started.