When you have more loans than you can track – and it is difficult to make payments – the debt consolidation program can offer assistance. Before applying, find out how they work and evaluate if you really need to use one.

What is a debt consolidation program?

A debt consolidation program is a service that involves combining multiple loans into one payment. In most cases, a “program” is a service offered by a credit counseling company or organization: you pay to one business, and they pass your payments on to creditors.

Conditions can be confusing. Debt consolidation loans (as opposed to programs) are a brand new loan used to pay off other loans.

Both approaches have similar results, although they work very differently:

  • Make multiple payments instead of multiple payments
  • You probably have a lower monthly payment than you had before
  • You may end up taking longer to pay off your debt
  • Let’s hope you get a lower interest rate, though you could still spend more on interest

Again, the main difference between a debt consolidation loan and a debt consolidation program is that the loan results in a change in your debt to a new loan. The program, which we will explain below, is a service that helps you pay off debts where they are.

If you have good credit and sufficient income, credit consolidation may be your best option. Compare the fees you will pay for the loan or program and decide what is best.

How Debt Consolidation Programs Work?

A debt consolidation program is a service that helps you manage your debt.

With the help of a non-profit credit counseling agency or a non-profit, you will set up a plan and system for debt relief within three to five years.

Start with counseling: The first step of a debt consolidation program is counseling. You will speak with staff with your service provider to determine if they can or cannot help and come up with a plan.

This is a good opportunity to learn about your debt – and to ask about fees and how the organization works. If you get a bad feeling, try another company.

You will pay fees: Although some organizations are nonprofit organizations, expect to pay setup fees and monthly fees. Compare fees across organizations before selecting them. When you are struggling financially, those dollars are important.

Unsecured loans only: Debt consolidation programs are for secured debt only. In other words, credit cannot be secured through collateral (for example, home loans and car loans will not work). Unsecured debts include loans such as credit cards, personal loans, and some student loans.

You have kept your accounts: With the debt consolidation program, your loans will still be where they are now – you are not getting a new loan or starting a debt. You will make one monthly payment to your service provider and the funds will then be distributed to different creditors. Your service provider communicates with your creditors during the setup process and as the program progresses.

No New Debt: The goal is to eliminate debt, so adding debt will not work. You must close most of your credit cards and agree that you do not take on new loans while making old loans.

Lower payments? Ideally, you will pay less each month, but more of that money will go towards reducing your debt. Your interest rates can also be reduced to help with payments, and you may even see penalty fees. Sound too good to be true? Of course, there is a trade-off (not to mention the fees you pay to your service provider).

Credit Effect: Using a debt management program can damage your credit. Your service provider will negotiate with the lenders, and you will probably end up paying less than you have to pay each month. As a result, your credit scores may fall. If you had perfect credit before the consolidation program, you will definitely notice a hit. If you still miss payments and pay later, the effect can be modest.

Choosing a Debt Consolidation Program

There are numerous companies that want to help you manage your debt.

How do you know which one is best? Ask around, read reviews and provide research services. Start with organizations that have a strong reputation.

Remember you may not need a debt consolidation program: you can do this yourself. Instead of paying a fee, you spend time and energy – but you can have more time and energy than money. Talk to creditors to see if any relief is available. If you are unlucky, or want to enroll an experienced helper, talk to a credit advisor.