Debt consolidation vs. credit counseling

By Nooreen B
Modified on April 24, 2023
debt consolidation vs. credit counseling

When looking for a debt management plan, you will likely encounter debt consolidation and credit counseling. Each money strategy has its own pros and cons, and it can be helpful to know about each before you try them. Keep reading to learn more about debt consolidation vs. credit counseling. 

What Is Debt Consolidation?

Debt consolidation is when you take out one large loan to pay off multiple debts. These debts can include credit card debt, secured or unsecured debt, medical bills, etc. 

Debt consolidation can be a great solution if you have many high-interest loans or credit cards and want a lower interest rate and a more manageable repayment plan. With a debt consolidation loan, you will only have one monthly payment to worry about rather than multiple debts. 

What Kinds of Debt Consolidation Loans Are Available?

You can take out all kinds of loan types to pay off debt. However, the different options available to you will depend on your credit score and credit history. On top of that, although you can technically use any loan to consolidate debt, some loans work much better than others.

For example, a payday loan online won’t be a good option. It will only make a few hundred dollars available, come with high-interest rates, and must be repaid in about two weeks. While a personal loan can work well because interest rates can be competitive, you could get a long-term repayment plan, and loan amounts can be high. Here are some other loan options that can work well for debt consolidation: 

Balance Transfer Credit Cards

Some credit cards have an introductory 0% interest rate and provide the ability to transfer other credit card debt onto it. Balance transfer cards can work great for debt consolidation because you may not have any interest to pay in the first few months or even years! No interest means your monthly payments will only go towards the principal amount, which usually makes debt payoff faster. And once interest starts accumulating, with the right card, the interest rate may still be cheaper than the rates you initially had before consolidating your loans/credit cards. 

Specifically Debt Consolidation Loans

Many banks, credit unions, and private or online lenders offer specifically debt consolidation loans. These loans come in large amounts and extended repayment terms making them an excellent option to look into. Your credit scores and credit rating will determine your qualification and the interest rates you will get with these loans. 

Student Loan Programs

If you are struggling to pay off your student loan debt, student loan programs can help. The Federal government offers Direct Consolidation Loans, which allow you to combine several federal student loans into one single loan. There are also similar options from private lenders if you are repaying private student loan debt (loans you did not get from the government). 

Home Equity Loans 

If you are a homeowner, you can consider taking out a home equity loan to take care of existing credit card debt, loans, or any other form of debt. Home equity loans can be a great tool for consolidating debt because their interest rate can be pretty low, ranging from anywhere between 3% and 12%, and you could get up to 30 years to repay the funds. Additionally, unlike credit cards and some loan options, you won’t necessarily need the best credit rating. 

Is Debt Consolidation Right for Me?

Debt consolidation can be right for you if you have multiple monthly payments that you struggle to track or repay due to high-interest rates/fees. However, this debt management strategy may not work for everyone! If you do not have the best credit or assets to secure an affordable loan, taking out a new loan may not be worth it. With debt consolidation, one of the primary goals is to get a better interest rate. If you cannot do so, another debt management plan may work better for your financial situation. 

What Is Credit Counseling?

Credit counseling is the process of getting help with your money, including debt. Rather than explicitly taking out a loan to consolidate debt, credit counseling involves reaching out to a credit counselor to get a plan for your money. 

Many of the credit counseling places you will find will operate as non-profit credit counseling agencies, which means the services will be free! Here are some of the things you can expect along with a trained credit counselor: 

  • Coming up with a personalized plan for your money. 
  • Information on savings and budgeting. 
  • Learning about debt management plans.
  • Help with access, reading, and understanding your credit report.
  • The basics of financial literacy. 
  • Access to different educational workshops. 

On top of the things they can teach you, credit counselors can act as a middleman between you and your creditors/lenders. They can negotiate interest rates for lower monthly payments, more flexible repayment terms, and even help with debt settlement

Where Can I Find Credit Counselors?

Because non-profit credit counselors are free, they may be the best place to start your search. The Financial Counseling Association of America and the National Foundation for Credit Counseling are great places to begin your search when looking for non-profit credit counseling agencies. You also do have the option to pay for services from someone like a financial advisor who may be able to take credit counseling further with things like investment advice. You can find financial advisors online, with banks, credit unions, and other financial institutions. 

Some Things To Consider With Credit Counseling

Credit counseling organizations can definitely be a great option when trying to pay off all your debts. However, it may take some time to find the right fit and even more time for your finances to get on track for debt repayment. And so, this option is definitely not a quick fix. Additionally, if you don’t want to dive deeply into your money, this may not be your best solution. 

Figuring Out Which Is Right for Me’ Debt Consolidation vs. Credit Counseling

Now that you know some of the basics that come with both a debt consolidation loan vs. credit counseling, you may have a better idea of where to go. However, if you are still unsure about the decision, here are some tips that can help:

  • Debt consolidation works best for those with multiple credit card balances and loans who want a single monthly payment. In comparison, credit counseling is best for those with poor financial habits and also have debt they wish to pay off. 
  • Debt consolidation can be faster than credit counseling.
  • Credit counseling can actually include debt consolidation!
  • Credit counseling can help with more than just debt management and have long-term positive effects on how you handle money. 
  • Credit counseling may be able to help more if your goal is to be debt free rather than have better repayment terms with existing debt.

What is credit counseling? | Consumer Financial Protection Bureau
Home Equity Loans and Home Equity Lines of Credit | Consumer Advice

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