Debt Consolidation Loans vs. Credit Counseling: Which Is Better For You?

Debt can feel like a heavy burden. If you’re struggling under the weight of high-interest credit card balances, medical bills, or other debts, you may be looking for the most effective way to pay them down. Two popular options are debt consolidation loans and credit counseling services. But how do you know which one is the best choice for your situation?

I’ve taken an in-depth look at the key differences between debt consolidation loans and credit counseling to help you determine the better path forward. Keep reading for a full comparison of these two debt relief strategies.

How Do Debt Consolidation Loans Work?

Debt consolidation loans allow you to roll multiple debts into one new loan with one monthly payment. The goal is to secure a lower interest rate, resulting in less interest paid over time compared to keeping your debts separate.

There are a few different types of debt consolidation loans:

• Personal loans – Unsecured loans from banks credit unions or online lenders. Amounts range from $1,000 to $100,000 with repayment terms from 1 to 7 years. Credit score requirements vary.

• Home equity loans or lines of credit – Secured loans using your home as collateral. Interest rates are lower than other loan types, but you risk losing your home if you default.

• Balance transfer credit cards – Transfer your credit card balances to a new card with a 0% intro APR for 12-21 months Pay down balances faster when not accruing interest

To get a debt consolidation loan you’ll fill out an application with a lender, allowing them to check your credit report. If approved the lender will deposit the loan amount into your bank account or pay your creditors directly. You then make one monthly payment to the lender.

What Are The Benefits of Debt Consolidation Loans?

• Lower interest rate – If your credit score is good, you may qualify for interest rates starting around 6%. This saves money compared to high-interest credit card rates.

• Single payment – Simplify your finances with one predictable loan payment versus multiple credit card payments.

• Pay off debt faster – Lower interest costs mean more of your payment goes to principal. Some loans have shorter repayment terms too.

• Improve credit – As you pay down balances, your credit utilization ratio drops, boosting your credit scores.

What Are The Drawbacks of Debt Consolidation Loans?

• Credit check required – The hard inquiry from loan applications may briefly lower your credit scores.

• Loan denial – Those with lower credit scores may not qualify for the best rates on debt consolidation loans.

• Closing costs – Loans may charge origination fees of 1-5% of the amount borrowed.

• Collateral required – Home equity loans use your home as security, risking foreclosure if you default.

• Ongoing interest – While lower, interest charges continue adding to your overall repayment costs.

How Does Credit Counseling Work?

Non-profit credit counseling agencies can provide guidance to help you tackle debt through services like:

• Financial education – Counselors teach budgeting skills, smart use of credit, and consumer rights.

• Debt management plans (DMP) – Consolidate unsecured debts into one payment and negotiate lower interest rates with creditors.

• Student loan counseling – Review options like income-driven repayment plans and loan forgiveness programs.

• Pre-bankruptcy counseling – Required sessions before filing review your options.

• Credit report reviews – Verify accuracy and dispute any errors on your credit reports.

In a typical counseling session, you supply details on income, expenses, and debts. After discussing your situation, the counselor presents options and you decide on next steps.

What Are The Benefits of Credit Counseling?

• Lower interest rates – Creditors may agree to 0% interest on debts in a DMP, reducing total interest paid.

• Lower payments – Based on what you can afford monthly, stretching repayment out over 3-5 years.

• One payment – The agency distributes funds to your creditors month.

• Save money – No loan fees and potential late fees may be waived when you enter a DMP.

• Ongoing support – Your counselor is available if new issues come up. Educational resources provide ongoing money management guidance.

What Are The Drawbacks of Credit Counseling?

• Monthly fees – You pay $25-75 on average each month you’re enrolled in a DMP.

• Credit impact – Entering a DMP may lower your credit score as cards are closed. Debts not in the DMP go into default.

• All unsecured debts required – For a DMP, the agency won’t work with your creditors unless all unsecured debts like credit cards are included.

• Loan payments unchanged – Any secured or student loan debts aren’t included in the DMP so those monthly payments don’t go down.

• Long process – It takes 3-5 years on average to complete a DMP.

Key Differences Between Debt Consolidation Loans and Credit Counseling

Which Is Better – Debt Consolidation or Credit Counseling?

The right option comes down to your specific circumstances. Ask yourself these questions:

• What is your credit score? Debt consolidation loans require good credit – 680+ FICO score on average. If your credit is poor, credit counseling may be the only option.

• Are you able to make minimum payments? For a debt management plan, the agency needs to be able to negotiate lower payments with creditors. If you can afford minimums, a consolidation loan may work better.

• Do you have assets or collateral? Home equity loans require you to use your home as security. Other consolidation loans are unsecured.

• Do you need to stop credit card use? Counseling programs make you close accounts. Consolidation loans allow you to keep using credit responsibly.

• Is interest rate reduction most important? Credit counseling aims for 0% interest while debt consolidation can usually get a lower fixed rate versus credit cards.

• Do you want ongoing budgeting help? Credit counseling provides financial education and ongoing support.

See If You Qualify for Debt Relief

The best way to decide between debt consolidation and credit counseling is to check your loan offers and compare programs.

You can easily view personalized loan offers from multiple lenders at LendingTree without impacting your credit score. Then speak to credit counseling agencies like NFCC to evaluate their debt management plans.

Comparing real options side-by-side allows you to see which path may save you the most money over time. Most importantly, make sure the solution you choose is affordable given your budget.

Whichever debt relief option you pursue, commit to smart money management going forward. Adopting healthy financial habits is just as important as tackling your existing debts. With focus and discipline, you can overcome debt and achieve lasting financial freedom.