Debt Consolidation Fees and Costs

We’ve been writing about debt consolidation a lot lately – and one of the reasons is that there is so much confusion surrounding this topic. A lot of companies out there are promoting “debt consolidation programs” that are actually debt management or debt settlement programs. This makes it hard to answer even basic questions like “How much does debt consolidation cost?

Debt consolidation fees and costs

To help you cut through the misinformation, we’re going to examine the various costs of debt consolidation, including any fees and interest charges that might apply. We’ll also explain how these costs compare to those for debt settlement or debt management

Keep in mind that there are several different ways to do debt consolidation, including: a debt consolidation loan from a bank or peer-to-peer lender, a home equity loan, or a credit card balance transfer. (See our article Is Debt Consolidation a Good Idea? for a more detailed description of these)

What Kind of Debt Consolidation Fees Should I Expect?

Here’s a pretty comprehensive list of all the kinds of fees you should research when looking into the possibility of doing debt consolidation:

Origination fees: This type of fee often applies to new loans, whether it be a home equity loan or an unsecured debt consolidation loan. Lenders argue that these fees are necessary to cover the administrative costs of initiating your loan. Origination fees can be anywhere from 1% to 5% of your total loan amount (which is a lot!) so don’t take these lightly. In some cases, however, you won’t need to pay an origination fee when you get a debt consolidation loan.

Closing fees: This is another term for origination fees.

Annual fees: You’re especially likely to have an annual fee if you get a home equity loan or home equity line of credit (HELOC), and often you’ll have an annual fee with a balance transfer. These fees are often around $50 (though they can be less).

Balance transfer fees: When you do a balance transfer, you’ll have to pay a fee right off the bat that’s equivalent to a small percentage of your total balance (kind of like an origination fee). Usually, the initial balance transfer fee is between 3-5%.

Late fees: These obviously can vary quite a bit depending on what type of debt consolidation you’re doing. If you do a balance transfer, you need to be extra careful about late fees, because while normal credit card late fees run between $15 and $35, a late payment during a balance transfer introductory period can cost you hundreds of dollars. That’s because, according to the terms of most balance transfer offers, you start with a low (or even zero percent) interest rate for a limited period of time – but that disappears if you make even one late payment. Other late fees are not so drastic, however, you should still be aware of them and avoid them as much as possible.

Early cancellation fees: These are common when taking out a HELOC. For example, you may be charged either a flat fee (up to $400 or $500) or a percentage fee (around 1% of the loan amount) if you decide to close the line of credit within the first three years. The reason for this fee is that the company would prefer to earn more interest from you, rather than having you quickly close the account.

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What Are Other Costs Of Debt Consolidation?

Other than the fees mentioned above, the only other costs are the interest charges, which as you might expect, depend upon the terms of your agreement and the type of debt consolidation you do.

If you get a debt consolidation loan from a bank or other lender, your interest rate will likely be between 7% and 30%. That means, on a loan of $10,000 you’ll be paying approximately $700 to $3,000 per year. If your credit score is good (i.e. above 700) then you’ll probably be able to find an interest rate less than 20% – and hopefully much lower.

On the other hand, if you decide to do a credit card balance transfer, you might not have to pay any interest for the first 12 months. Many credit card companies offer balance transfer deal with 0% APR during the introductory period, which can last up to a year (or even 18 months). But be careful, because as we mentioned above, you can quickly lose your 0% interest rate if you make a late payment OR if you don’t pay off your entire balance within the introductory period.

Finally, if you get a home equity loan or HELOC, your interest rates will usually be somewhere between 4% and 10%, however you are taking on much more risk than with other types of debt consolidation because you could lose your home if you aren’t able to make the payments. That’s why using a secured loan (which means one backed by collateral or property like your house) to consolidate your unsecured debt (not backed by collateral) is not recommended.

(For more information about each type of debt consolidation, read our post on Debt Consolidation Programs)

How Do Debt Settlement Fees Work?

So now that you understand how debt consolidation fees work, you might be wondering how they compare to the cost of debt settlement.

The fees for debt settlement are quite a bit different. When you work with a debt settlement company, you are essentially paying them to negotiate with your creditors so you can pay a fraction of your balances in a lump sum to cancel your debts. These companies are not allowed to charge you an upfront fee if they contact you over the phone (unless they’re a non-profit) — instead they are legally obligated to wait until they’ve helped you settle at least one of your accounts, and even then they can only charge you an amount that is proportional to the amount of your debt that was settled.

Now, there may be other costs of doing debt settlement, and these are not as obvious. Since debt settlement requires that you pay your monthly amount to an escrow account instead of directly to your creditors, you will incur late fees on each of the accounts you’re trying to settle. This can sometimes cause your interest rates to skyrocket as well. If you don’t succeed in settling those debts, you will have more debt to deal with because of the fees and interest charges.

How Do Debt Management Fees Work?

Unlike debt settlement, the fees for debt management are somewhat predictable. Usually you will pay a monthly fee of between $15 and $50 to the debt management company or government-approved credit counseling agency that is in charge of your debt management plan.

In many cases, you will also need to pay a small fee to enroll, but you can almost always get at least one meeting with a credit counselor at no cost before deciding for sure if you want to do a debt management program. There are certain agencies that require you to buy educational materials that instruct you on how to budget your money better and how to get out of debt. These may sometimes cost $20 or more.

If the debt management plan is successful, you will still have a monthly amount that you must pay, which will be split between your creditors. You’ll need to pay that for 3-6 years on average in order to get out of debt. Late or missing payments during that time could result in late fees and increased interest rates.

Do Your Research On Debt Relief Costs and Fees

The bottom line is that you need to be well-informed about the different fees and costs of each type of program before you commit to any particular one. Each of the debt reduction methods discussed above can work for some people in certain situations, but they can also hurt you and make your situation worse if you are not prepared and/or don’t know what to expect.

So do your research and ask plenty of questions before you decide to use a debt consolidation loan, debt settlement, or debt management program to get out of debt. And if you’re trying to decide between several types of debt relief, see our article on the Ways To Get Out Of Debt.

Have more questions? Just post a comment below and we’ll do our best to answer it.

This article is part of our Debt Consolidation Resource Center.  If you’re looking for additional information about debt consolidation, be sure to pay a visit!

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  • hi

    Today I learned you can have a 700+ credit score and still have debt….what?

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Yeah, it’s definitely possible! In fact, it’s relatively common. :)

  • Thomas Bright

    Nice post and very informative. One question, though. Are you sure that ALL upfront debt settlement fees are illegal? I think I read somewhere that this only applies to for-profit companies and services that are sold over the telephone, because it fell under some sort of telemarketing law from 2010. Do you know if this has been expanded? I doubt it matters much, because most settlement companies probably fall into this category. But, it is unsettling to think that there are companies out there who can still charge upfront fees…legally.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Hi Thomas, you are right! Thanks for pointing that out. I’ve updated the post to reflect that. It is indeed unsettling to think that some companies can still charge these predatory upfront fees. Also, I’m glad you liked the post! I appreciate it.

  • B

    Hello,
    Thank you for all of this helpful information. Do you know if there are fees for simply filling out the Federal Direct Consolidation Loan Application on StudentLoans.gov? If so many fees are associated with consolidating through a bank or private group, I am wondering if this option is easier and more cost-effective?

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      For federal student loans, that is definitely a good idea. There should not be any fees for consolidating federal student loans. However, you can learn more about that process in detail here: https://studentaid.ed.gov/repay-loans/consolidation.