When Does it Make Sense to Do Debt Consolidation?

debt movement2-15-13If you are faced with mountains of debt, collection calls, and can’t seem to figure out a way to make sense of it, it may be time to explore debt consolidation.

Debt consolidation comes in many forms; from loans, to DIY programs, to debt relief providers.

With lots of options and a competitive market it is important to do your research to determine what is best for you and your personal financial situation.

What is a debt consolidation loan?

A debt consolidation loan typically allows you to pay off all your existing bills at once, while making a single, monthly payment to a new lender.

With this option, you’ll enter into a loan agreement with the new lender, who pays off your creditors.

This allows you to consolidate all of your debt into one new loan – meaning you’ll repay the new lender for the amount borrowed to pay off your other bills.

Be sure to do your research to determine if a debt consolidation loan is right for you. While it’s a quick way to get out of debt, there are many factors to consider – including interest rate, terms and fees.

  • Interest rates. Interest rates on a debt consolidation loan vary and may be higher than what you’re currently paying to each of your existing creditors, and the repayment terms of the new loan may mean you’ll be making more total payments to clear your debt.
  • Additional fees and collateral. The new lender may assess additional fees and require collateral on the new loan, such as a car or home, to encourage repayment. If collateral is required, the lender has a right to seize these items if you default on the new loan.

Even with potentially higher interest rates, longer repayment terms and additional fees, for many consumers a debt consolidation loan still makes perfect sense, as it helps them get out of debt quickly and easily.

Not to mention, they now owe just one payment every month, rather than having to remember to pay multiple bills.

Alternatives to Debt Consolidation Loans

DIY Debt Consolidation

Getting out of debt on your own is possible but you will need to be diligent and aggressive to make it work for you. If you can:

  • Afford to pay more than the minimum payments each month.
  • Remain disciplined and motivated to get out of debt.
  • Are willing to make some changes to your budget to afford additional payments to your creditors.

Depending on how much debt you have, what your disposable income is, and how disciplined you are – you may be able to get out of debt by tightening your budget, and increasing the amount of money you pay to your creditors each month.

If a consolidation loan doesn’t work for your personal financial situation and you need help you might want to consider using a debt relief provider. Debt relief providers often offer debt management plans, debt settlements plans or both. To determine which type of plan is best for you , you will need to understand how each plan works.

Debt Management Plan

A Debt Management Plan (DMP) is an agreement between you and a debt relief provider. Simply put, you repay your unsecured debts in full over time in a single monthly payment that is distributed to your creditors by your DMP Provider.

In return, after 3 consecutive DMP payments, most creditors will agree to significantly reduce your interest charges, eliminate late and over-the-limit fees, and reduce the amount of your monthly payments.


  • Most creditors reduce interest rates and eliminate late fees
  • Most creditors reduce your monthly payments
  • One consolidated payment for your unsecured debts
  • Benefits typically begin after 3 timely payments
  • Collection activity should stop quickly
  • Debt is repaid in full
  • Less negative credit impact than settlement


  • Some creditors do not participate
  • You may not take on any additional debt while on the program
  • You must make consistent monthly payments to ensure benefits continue

Debt Settlement

Debt settlement is an attractive alternative to bankruptcy for those who want to pay back at least a portion of their debt, but cannot afford a debt management plan or debt consolidation loan.

With Debt Settlement, you make monthly deposits to a settlement deposit account in an amount you can afford. You do not make monthly payments to your creditors, and your provider works to negotiate with your creditors for a less-than-full repayment.

When settlements are reached with creditors, settlement payments are paid from the settlement deposit account. There are definitely pros and cons to using debt settlement to pay off your debt.


  • May reduce your total debt drastically
  • You save each month an amount you can afford to use to fund settlements
  • Provides flexible payment arrangements (changes can be made if needed)
  • Attractive alternative to bankruptcy
  • Settlements typically completed in 3-5 years


  • Credit profile will be negatively impacted
  • Debt is not repaid in full
  • Creditors are not required to accept settlement offers
  • Debt balances are likely to increase (i.e. late fees, interest) while settlements are being negotiated
  • Collection activity will escalate
  • It typically takes 6+ months before the first settlement occurs
  • You may be taxed on the portion of the debt you don’t pay back

A careful review of your debt consolidation options is important. No matter what you decide, make sure what you choose is something that you can commit to. Debt freedom is in reach, you just have to take the first step!

NewBrandCramer_About the Author:

Suzanne is a Certified Personal Finance Counselor® and Social Media Specialist for CareOne Services, Inc. 

She supports the Ask the Expert forums as a coach and writes for A Straight Talk on Debt. Suzanne is a divorced, single mom living in Pennsylvania.