Are Debt Consolidation Companies Worth It?

debt consolidation companies

Debt consolidation is an umbrella term that includes many different approaches to paying off debt. For example, many debt settlement companies advertise themselves as debt consolidation companies, even if they don’t use traditional consolidation programs.

There are also opportunities to do debt consolidation on your own or through a credit counseling agency. Learn more about each option and how to determine if they’re worth it.

Debt consolidation companies explained

The process of debt consolidation involves combining multiple debts into one account or one payment. In many cases, it can be a good way to simplify your debt repayment plan and possibly even save money along the way.

In some cases, though, debt and credit card consolidation companies actually do debt settlement, which is a different beast entirely. Here’s a quick summary of each option you have for debt consolidation.

DIY debt consolidation

The most traditional form of debt consolidation can occur with a balance transfer credit card or personal loan (sometimes called debt consolidation loans). With both of these options, you can use the new card or loan to pay off one or more other debts, resulting in just one monthly payment going forward.

In the case of balance transfer cards, you’ll typically get an introductory 0% APR promotion. This promotion can last anywhere from six months to over a year and a half. During this time, you won’t pay interest on your balance as long as you pay at least the minimum every month. If you can qualify with good credit, it can save you hundreds on interest, even with an upfront balance transfer fee.

A personal loan won’t give you an introductory rate, but on average, personal loans charge lower interest rates than credit cards. What’s more, a personal loan gives you a set repayment schedule, which isn’t an option with credit cards. It can be a good option if you can qualify for a low rate.

Debt management plans

A debt management plan is another debt consolidation program, but instead of combining your debts together, it just combines your payments.

More specifically, when you sign up for a debt management plan through a credit counseling agency (preferably a nonprofit), the agency will take over paying your eligible debts on your behalf. In some cases, it may even be able to negotiate lower interest rates and monthly payments.

In exchange, you make just one payment to the agency each month, which it distributes to your creditors.

Debt management plans typically take three to five years to complete. You’ll usually be required to pay a modest upfront and monthly fee.

Debt settlement

Debt settlement isn’t technically debt consolidation because it doesn’t combine debts or monthly payments. However, when you come across lists of the best debt consolidation companies online, some of them may be debt settlement services instead.

This process involves working with a company to settle with your creditor for less than what you owe. To do this, you typically need to stop making payments on your account and pay into an account with the company instead. Once your balance with the company is large enough, it will use that money to negotiate.

Note, however, that if you want to settle a debt, you can settle on your own, or also work with an experienced attorney to help you.

Are debt consolidation programs worth it?

The best debt consolidation companies offer affordable ways to pay down debt. Unless you’re in serious financial trouble, your best bet is to do a DIY consolidation plan. Options include a credit card or a personal loan. If you can take advantage of a lower APR or set repayment schedule, you may be able to pay down your debt faster and save money along the way.

If you’re starting to struggle with keeping up with your payments but aren’t yet behind, a debt management plan may be worth it. This is especially the case if your credit isn’t in good enough shape to qualify for a balance transfer credit card or a low rate on a debt consolidation loan.

To make it worth it, though, you’ll want to make sure you stick to your plan. If you’re not sure if a debt management plan is for you, speak with a credit counselor — they typically offer free initial consultations and can give you an objective view on the right path forward.

Finally, debt settlement isn’t ideal, but it may be the best option if your only alternative is bankruptcy. The process requires you to stop making payments on credit accounts, so it can be hard on your credit. But it won’t be as bad as bankruptcy, and getting your finances back on track may be worth allowing your credit score to drop for a period of time.

The bottom line

Debt consolidation can be an excellent way to pay down your debt in a more effective way. You may even be able to enjoy some savings in the process. But when you’re searching for the best debt consolidation companies, you’ll want to make sure you know what they’re offering.

If it’s a bank or credit union, for instance, it’ll likely be a personal loan or balance transfer credit card. In contrast, debt management plans are offered through credit counseling agencies. Finally, debt settlement is performed primarily by debt settlement companies, even if they bill themselves as debt consolidation companies.

If you’re thinking about debt and credit card consolidation, take your time to consider all of your options. Also, make sure to compare different companies or agencies if you get to that point. Doing this will help ensure you find the best fit for you.

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