What are Debt Consolidation Programs?

Houses, cars, businesses, medical bills, school tuition fees? Because our 9-to-5’s might not generate enough for us to pay for these things in cash up front, the best way to get what you need now and pay for it later is by acquiring a loan. If you know how to budget your money and you’re confident in your capability to pay off your monthly amortization, then a loan can be your best friend. But of course, money doesn’t always work the way we anticipate.


Enter debt consolidation programs. According to statistics, the average Canadian owes $1.7 of debt on every $1 that they make. That’s why these debt consolidation programs have become more and more popular throughout the years. What is a debt consolidation program, how can it help you, and how do you qualify? Here’s what you need to know.


What is a Debt Consolidation Program?


A debt consolidation program is a program that you undertake with a for-profit company or a credit counseling agency. They come up with a plan to help you pay off your debt, and consolidate all of the payments into one monthly amount. They coordinate directly with your creditors, and they’ll work to get you better interest rates so you end up paying lower monthly totals.


Your loans stay where they are, and you’ll still have to pay them off. But the agency or company will provide you the payment scheme, will work to reduce the amount you pay, and will make it more feasible for you to complete all of your payments without feeling financially burdened. In exchange, you pay them a fee which serves as their profit.


Debt Consolidation Program vs Loan – What’s the Difference?


While they sound similar, debt consolidation programs and debt consolidation loans are two completely different financial services. For the most part, the difference lies in the fact that a consolidation program simply offers you solutions to help ease the payment process and cost. Your loans aren’t eliminated, you still pay for them monthly, and there isn’t any new loan being released.


With a debt consolidation loan, you basically acquire another loan and use that amount to pay for all of your existing debt. What you pay for monthly is the amortization for the new loan. The benefit is that you can argue for a lower interest rate, which can make it easier on the pocket. Plus, if your lender agrees to an extended loan term, then you might be able to stretch out your payment to enjoy lower monthlies.


What Are the Benefits of Loan Consolidation Programs?


  1. No New Debt – It would seem counterintuitive to take out another loan to pay for loans that you’re already struggling to pay for. What’s nice about a consolidation program is that you won’t put yourself in another debt situation – you maintain your existing loans and simply learn to manage your payments better.


  1. Improve Your Debt Management Skills – If you’re having a hard time juggling all of the loans you have, and you’re worried that you might not be able to handle new loans in the future, then a debt consolidation program can help you learn the ropes. Working alongside your agency or company, you’ll learn more about debt management, giving you invaluable knowledge that you can use later on.


  1. Lower Monthly Payments – Depending on the company or agency you choose, you can save a lot of money with a debt consolidation program. Your chosen agency will help reduce the interest you pay, so you can enjoy more reasonable payments that will hopefully be easier for you to issue without having to empty your pockets each month.


  1. Just One Payment – If you have several loans, then it might be a challenge to keep tabs on every single one throughout the month. If the payments’ due dates come at varying times in a month, it can often feel like you’re drowning in dues. With a consolidation program, all of your payments are condensed into one. This makes it easier to prepare yourself for the cash-out, giving you the rest of the month to get your funds ready for that one-time monthly payment.


The Downsides of Consolidation Programs


  1. Your Credit Takes a Hit – The main downside of a debt consolidation program is that your credit will ultimately take the biggest hit. Any agency or company you choose to work with will have to talk to your creditor to secure a lower interest rate for your loan. In doing so, they also impact your credit score. Expect your rating to take a hit if you opt for a debt consolidation program.


  1. Longer Payment Period – To further lower the monthly payments you make, your company or agency might choose to extend your loan term. The total amount is then spread over a longer period of time, and thus the amortization is significantly reduced. On the downside, you will have to keep making those payments for an extended period of time.


  1. You’re Only Eligible on Non-Collateral Loans – Debt consolidation programs can only be offered on non-collateral loans. That means that you’re only eligible for the program if you’re hoping to find relief for credit card loans, personal loans, and other debt that’s not secured against collateral like your house or a car.


Who Offers Debt Consolidation Programs?


Just as there are a range of reliable, trustworthy credit counseling companies out there, you should also be wary of groups that might not have your best interest in mind. Make sure you shop around for the right debt consolidation agency to make sure you’re really putting your financial security in good hands.


The first step of the process of planning a program is counselling. During that first meeting, your chosen agency should take the opportunity to explain your debt situation and what might work for your unique case. If during the first meeting, you get a bad feeling about your agent or the agency behind him, then don’t be afraid to shop around. It also doesn’t hurt to read reviews online to find a reliable agency or company that can provide you quality services without putting you at risk of further financial turmoil.

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Khadija Bilal

Khadija holds a bachelor's degree in business administration. She is a professional writer with 7+ years' experience in the industry. Khadija has a small family and loves spending time with them.