Debt Consolidation Loans vs Debt Management through Credit Counseling

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?

The most popular option doesn’t work for most people

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:

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.

Challenges with debt often lead to missed payments and collections, which drag down your credit score. 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

Debt Consolidation Loan vs Debt Management Program: Deciding if a loan or DMP through a credit counseling service is right for you
Amount of Debt: Debt Consolidation $1,000-$50,000, DMP $5,000-$100,000+
Time to Payoff: Debt Consolidation 12-60 months, DMP 36-60 months
Interest Rate: Debt Consolidation 10-22% (based on credit score), DMP 0-11% (on average)
Fees: Loan origination fee (0.5-1% of loan amount), DMP monthly administration fee, set by state where you live (average $49)
Credit score required to qualify: Debt consolidation 660 or higher, DMP no score requirement (300 and up)
Debts you can include: Debt consolidation any unsecured debt, in some cases including student loans, DMP primarily for credit cards, but you may also include medical, personal loans, and collections
Can you keep your credit cards? Debt consolidation yes, accounts remain open, DMP cards included will be closed, but you may keep a card out of the program
Credit impact: Debt consolidation positive (when done correctly), DMP neutral or positive, although there may be a slight temporary drop in score when certain cards close
Professional support: Debt consolidation no, DMP yes
Source:https://www.valuepenguin.com/personal-loans/average-personal-loan-interest-rateshttps://www.investopedia.com/terms/o/origination-fee.asphttps://www.marcus.com/us/en/resources/credit-score/credit-score-for-a-personal-loan

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.

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 for over 27 years

Consolidated Credit is one of the nation’s largest nonprofit credit counseling agencies. In 27 years, we’ve provided free credit counseling to over 10 million people. We’ve also helped people consolidate over $9.5 billion in unsecured debt.

These case studies show how Consolidated Credit has helped a few of our clients successfully consolidate, regardless of how much they owed.

Written by :
Meghan Alard [email protected] Financial Literacy Specialist