Debt Consolidation Programs

So you’re interested in debt consolidation but you don’t know what type of debt consolidation programs are out there? You’re not the only one – it’s pretty darn hard to find credible information that you can use to compare your options.

Debt consolidation programsFor that reason, we wanted to compile as much information as possible in one place about the different types of debt consolidation programs in order to help you, and everyone else, make well-informed decisions about what path makes sense to deal with your debt.

But before you can truly see the differences between the various options, you need to understand these important factors:

  • Amount you can consolidate: Various debt consolidation companies have different limits on how much they’ll allow you to consolidate. In some cases there is a minimum amount – in other words, if their minimum is $3,000, they won’t let you consolidate only $1,500 worth of loans. And in almost all cases, there is a maximum amount you can consolidate.
  • Fees/Costs: These fees are separate from your interest rate and are often included at the beginning of the process (sometimes referred to as “origination fees”)
  • Your new interest rate: One of the main reasons to do debt consolidation is to try to lock in a lower interest rate than what you have right now. You also need to pay attention to whether the new interest rate is fixed or variable.
  • Your monthly payments: Often a debt consolidation program will give you lower monthly payments than what you had before. This might be a blessing. But don’t just blindly go for the lower payment – because it has a direct effect on the…
  • Length of your repayment term: You must consider how long it will take to get out of debt with each plan, especially because compound interest dramatically increases your total cost over a long repayment term. In general, you should try to pay as much toward your debt each month as you can.
  • Eligibility: As you’ll see below, different debt consolidation programs have different requirements for eligibility. In some cases, you must have a credit score above a certain threshold or be able to prove your income is above a certain amount per month.

(For more information, see How Does Debt Consolidation Work?)

Okay, with these factors in mind, let’s take a detailed look at the type of debt consolidation programs that are available in each category. Keep in mind, we include the examples below to illustrate the differences between each type of debt consolidation, but this list is not comprehensive (it would be impossible to list every company that does debt consolidation). Without further ado… here are the most common types of debt consolidation:

Peer to Peer Debt Consolidation Loans

Peer to peer lending is a relatively new concept, but it has become quite common, in part because peer-to-peer lenders can often offer lower interest rates than traditional debt consolidation loans. We think peer to peer lending is one of the best debt consolidation programs available. But you should compare for yourself. Below are two examples of peer to peer loan consolidation:

Lending Club1

  • Amount: $1,000 to $35,000
  • Fees: Origination fees are included in your interest rate; late fees are $15 or 5% of your amount due (whichever is greater) and are assessed whenever you are more than 15 days late in making a payment.
  • Interest rate: 6.78% to 28% (based on your credit score and evidence of income)
  • Monthly payments: Depends on your interest rate and length of term
  • Repayment term: 36 or 60 months
  • Eligibility: Must have a credit score above 660

(Users of ReadyForZero are offered Lending Club loans as part of our Savings Platform, which identifies opportunities for you to save money and pay down your debt more easily. To be eligible, sign up for ReadyForZero)

Prosper2

  • Amount: $2,000 to $25,000
  • Fees: You will be charged a “closing fee” of up to 4.95% at the start of the loan; late fees are $15 after 15 days.
  • Interest rate: 6.59% to 35.85%
  • Monthly payments: Depends on your interest rate and length of term
  • Repayment term: 1 year, 3 years, or 5 years
  • Eligibility: Must have a credit score above 640

Debt Consolidation Loans from a Credit Union or Bank

Although they’re not specifically debt consolidation companies, it shouldn’t be a surprise that many credit unions and major banks offer debt consolidation loan programs. The terms and conditions of these loans can vary widely, however, depending on the particular institution, so as always it’s important to do your research. Here is one example of a debt consolidation loan offered by a credit union:

Orange County’s Credit Union Debt Consolidation Loan3

  • Amount: $1,000 to $25,000
  • Fees: Some late fees apply
  • Interest rate: 18%
  • Monthly payments: Depends on your individual situation
  • Repayment term: 12 to 66 months
  • Eligibility: Must open a member account with Orange County’s Credit Union to be eligible for the loan

Debt Consolidation with Home Equity Loan or HELOC

This option is different from all the other types of debt consolidation because it is a secured loan – meaning that you must use your house as collateral. If you were to default on a home equity loan or home equity line of credit (HELOC), you would be at risk of losing your home. So be very thoughtful about how you approach this type of debt consolidation. Here’s an example of a home equity line of credit:

Chase Home Equity Line of Credit4

  • Amount: Up to $250,000, depending on the value of your home
  • Fees: Origination fee of $50, annual fee of $50, and early cancellation fee of 1% or $400 (whichever is greater) if you close the line of credit within 36 months
  • Interest rate: 4.25% to 6.25
  • Monthly payments: Depends on your situation
  • Repayment term: Varies
  • Eligibility: You need a credit score of 700 or greater, proof of income, and you must live in the home you are using as collateral

Debt Consolidation with Credit Card Balance Transfers

One of the most popular forms of debt consolidation is the credit card balance transfer. However, you have to be careful when considering this option, because you can end up paying excessive interest rates if you ignore the fine print. In most cases, a balance transfer offer includes an “introductory period” with a 0% interest rate – usually from 6 to 18 months. If you know you can pay off your entire balance during the introductory period, then this is a good option for you. However, if you cannot do that, you should probably consider other debt consolidation programs. Here are two examples of balance transfer offers:

Discover More Card5

  • Amount: No limit specified
  • Fees: 3% of the balance you transfer; late fees of $35
  • Interest rate: 0% for 18 months on the balance you transfer and 0% for 6 months on new purchases, then 11% to 21% afterward
  • Monthly payments: Depends on your balance and interest rate
  • Repayment term: You should pay off your balance in 18 months to avoid the extra charges that begin after that period
  • Eligibility: Based on your credit score and amount of credit card debt

Citi Platinum Select MasterCard6

  • Amount: No limit specified
  • Fees: 3% of the balance you transfer; late payments result in higher interest rates
  • Interest rate: 0% for 18 months, then 12% to 22%
  • Monthly payments: Depends on your balance and interest rate
  • Repayment term: Again, you should pay off your balance in 18 months to avoid extra charges
  • Eligibility: Based on your credit score and amount of credit card debt
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Student Loan Debt Consolidation Programs

Obviously, many people are in a situation where they have a specific need for consolidating their student loans. Since student loans are different than most other loans (they tend to have lower interest rates and their repayment terms can be anywhere from 10 years to 25 years) consolidating student loans requires finding a consolidation program geared specifically toward student loans. If your student loans are owned or guaranteed by the federal government, you will want to do debt consolidation through the U.S. Department of Education. You can use this tool to find out what kind of loans you have.

U.S. Department of Education (Special Consolidation)7

  • Amount: Any amount
  • Fees: None
  • Interest rate: 8.25% or less
  • Monthly payments: Depends on your repayment plan
  • Repayment term: You can select one of the department’s repayment plans
  • Eligibility: You must have at least one direct loan from the federal government and at least one Federal Family Education Loan

(Read more about the Special Direct Consolidation Loan Program)

Wells Fargo Student Loan Consolidation8

  • Amount: $5,000 to $100,000
  • Fees: Origination fee and late fees depend on your situation
  • Interest rate: From 4.25% to 9% for variable rates, and 7.99% to 12.99% for fixed rates (depending on your credit score). You can also reduce your rate by 0.25% if you set up automatic payments and another 0.50% off if you’re a Wells Fargo customer
  • Monthly payments: Depends on your amount and interest rate
  • Repayment term: Usually 25 years
  • Eligibility: Based on credit score and other factors

Student Loan Network Student Loan Consolidation9

  • Amount: $10,000 to $300,000
  • Fees: 1% to 5% origination fee, and late fees
  • Interest rate: 5.5% to 9%
  • Monthly payments: Depends on your situation
  • Repayment term: 20 years to 30 years
  • Eligibility: Based on your credit score and application

Debt Management/Settlement Companies

You might be surprised to find out that some companies refer to their services as “debt consolidation” even though they do not actually offer debt consolidation loans.

Why would they do that? Well, because they know people are familiar with the term “debt consolidation” and they are hoping to find potential new customers for their services. Instead of debt consolidation, these companies usually offer debt settlement and/or debt management plans. That means you pay them a fee and they negotiate with your creditors on your behalf to reduce the amount of debt you owe (debt settlement) or set up a revised payment plan (debt management).

For some people, these are the best options. However, they require giving up a certain degree of control, and that means you take a risk. If the negotiation fails – and often it does, then your balances and interest rates might end up being higher than what you started with. That would harm your credit score, and you would lose the money you paid to the debt management or debt settlement company, despite the negative result.

For that reason, debt consolidation is a better option for people who prefer to maintain control over their payment plan and who simply need a lower interest rate and/or lower monthly payment.

———
We hope this information and the examples of different types of debt consolidation programs helps you understand your options much better. (If you’re still trying to decide whether debt consolidation is your best bet, check out our article Is Debt Consolidation a Good Idea?) We want you to be successful in your attempts to pay off your debt, and we know that having the right information provides the foundation for making good decisions. If you have further questions about debt consolidation or any other topic, please 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!

  1. Source: Lending Club Debt Consolidation – Lending Club []
  2. Source: Prosper Debt Consolidation – Prosper []
  3. Source: Orange County’s Credit Union Debt Consolidation – Orange County’s Credit Union []
  4. Source: Chase HELOC - Chase []
  5. Source: Discover Balance Transfer – Discover []
  6. Source: Citi Balance Transfer – Citi []
  7. Source: Special Consolidation Loan Program – Department of Education []
  8. Source: Wells Fargo Student Loan Consolidation – Wells Fargo []
  9. Source: Student Loan Network Student Loan Consolidation – Student Loan Network []

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