How Do Debt Consolidation Programs Work?


When you’re juggling more monthly payments than you can manage, a debt consolidation program may offer you some much-needed guidance. However, before you engage one, make sure you understand how debt consolidation works and determine whether it would be the best option for you.

What is a Debt Consolidation Program?

Debt consolidation programs are services that help debtors combine their multiple loans into one single payment. These companies are generally credit counseling agencies or organizations who will accept payments from you and transfer them to your creditors on your behalf.

A debt consolidation program is separate and distinct from a debt consolidation loan, which is a tool that many consumers use to help them pay off their high-interest debts. Essentially, debt consolidation loans involve shifting your debts to another loan. A debt consolidation program, on the other hand, involves engaging a service provider to serve as an intermediary between you and your creditors.

While both approaches have similar results – helping you pay off your high-interest debts faster – they work differently. When you engage a debt consolidation company or program:

  • You will make a single payment each month instead of multiple payments.
  • Your monthly payments may be lower.
  • You may extend your repayment timeline.
  • You will likely score a lower interest rate – but you could spend more money on interest over time if your repayment timeline is very long.

If your credit is strong and you have substantial income to meet your monthly payments, you may want to consider a debt consolidation loan as opposed to working with a debt management company. Before you choose, though, be sure to compare the fees you’ll pay for either a new loan or a debt management program, and weigh the pros and cons of each.

How It Works

A debt consolidation program will help you manage your debt, setting up a plan to help you become debt-free in a few years (generally 3-5 years).

The first step will involve credit counseling. You will speak with staff at the agency to learn whether debt consolidation is the best option for you. If so, your credit counselor will help you map out a plan, including the monthly payment amount, interest, and your repayment terms. Be sure to ask about fees and the terms of your agreement, and shop around until you find a company that you trust. When it comes to finding the right company for you, ask around, read reviews, look up the company in the Better Business Bureau, and trust your gut.

Once you engage a company, you will likely pay a setup fee and monthly fees. You will also be able to keep your loans in the same place, rather than shifting them around. In other words, you will not be taking on any additional debts or switching from one creditor to another.

Keep in mind that debt consolidation programs only apply to unsecured debt, in other words, debt that is not secured by collateral (for instance, home mortgages and car loans). Credit cards, personal loans, and some student loans are unsecured may be eligible for debt consolidation.

Credit Score Consequences

Engaging a debt consolidation program may impact your credit score. Your provider will reach out to your lenders to negotiate, and as a result, you may end up paying less each month than you would have if you’d chosen to handle your debt on your own. As such, your credit scores will likely reflect that you paid less than the total amount owed. 

However, if you were already struggling to meet your payments and periodically falling delinquent, you may not notice this impact as much as you would if you had perfect credit prior to seeking debt consolidation.

Seeking the Right Option for You

In the end, you may determine that debt consolidation is not the best path for you – and that is perfectly okay. However, be sure to speak with your creditors to see if they will offer you any relief through settlement, and if not, engage a trusted advisor, like your attorney or accountant, to help you decide which course is best.