Nonprofit Debt Consolidation: Is It A Good Option?

If you're in a situation where you have a large amount of debt and can't seem to get out from under it, it may be worth considering debt consolidation. It is possible to do a consolidation on your own, but sometimes it's also helpful to work with a company or nonprofit group that has experience with credit counseling. You'll want to choose a nonprofit debt consolidation company that has good reviews and truly has your best interests at heart.

How Debt Consolidation Works

Debt consolidation is a term that is used for someone in a financial situation with a large number of different debts and wants to combine and consolidate them. In many cases, someone with a large amount of debt may owe money to several different lenders. Each different outstanding loan may come with a different monthly payment and interest rate. Having so many different payments can make repayment challenging and setting up a debt management plan difficult to achieve.

Taking all of your different loans and combining them into a consolidation program can make a lot of sense for some people. Instead of having to worry about different loan amounts and credit card payments, there’s one loan that you can concentrate on paying down. Also, depending on your credit score and the information on your credit report, you may qualify for lower interest rates on your debt consolidation loan.

While it is possible to open this type of loan on your own, it can make sense to work with an outside company or agency that specializes in debt consolidation.

Types Of Debt That Qualify For Nonprofit Counselors

When working with a nonprofit debt consolidation counselor, only certain types of debt will qualify. The exact list of debt that can qualify in a debt management program may depend on the specific nonprofit that you’re working with and/or your own specific situation. Generally, it is unsecured debt that is more likely to qualify for a nonprofit debt consolidation. This can include credit card debt, student loans, personal loans or unpaid medical bills.

Debts That Are Ineligible For Nonprofit Debt Relief

Other types of debt, such as auto loans and mortgages, may not be eligible for help from nonprofit debt consolidation companies. If you are working with a nonprofit credit counseling agency, you'll want to make sure that you have a plan for how to handle all of your outstanding debt. If a company can't or won't handle one of your types of debt, you may want to consider working with a different company or making a plan to pay down that debt on your own.

Nonprofit Debt Management Companies Vs. For-Profit Companies

If you decide to work with a debt management or debt settlement company, you should be aware that there are two different categories of debt relief companies — nonprofit debt consolidation companies and for-profit companies. While both types of companies can make sense to work with in certain situations, you'll want to understand the differences and how each type of company makes money.

As its name suggests, a nonprofit debt relief company is not trying to turn a profit. That means they often get much of their funding via grants from individuals, foundations or the government or donations from individual contributors. While nonprofit debt relief companies may charge an upfront fee or monthly fees, they are often nominal (less than $50). Depending on your credit score or financial situation, you may not even have to pay any fees in order to get debt-free.

In contrast, a for-profit debt settlement company is in the business of making money and may not receive grants or donations. This means that the majority of their income comes from various fees charged to people looking for debt consolidation. While there are reliable and trustworthy for-profit debt consolidation companies that can help with your credit card bills, there are also scams. Make sure and do your research before choosing a company.

How To Choose A Nonprofit Debt Consolidation Company

When looking for a certified credit counselor to help with your debt consolidation, it's a good idea to check for reviews of the company to see how they have treated past customers. In addition to talking with friends or trusted advisors, you can read testimonials on the company's website or research reviews from the Federal Trade Commission or Better Business Bureau. Many nonprofit debt consolidation companies may also offer a free introductory counseling session to see if they will be a good fit.

The National Foundation for Credit Counseling (NFCC) is a nonprofit agency that works with accreditation of different credit counseling companies. The NFCC also has educational resources about money management and other personal finance topics that can help you bolster your financial education. As you become more knowledgeable about personal finance, you may be able to better pick a credit counseling company that can help you meet your financial goals.

Nonprofit Credit Counseling FAQs

Will consolidating debt affect my credit score?

Yes, it’s likely that consolidating debt will affect your credit score in a few different ways. You may see a small, temporary hit to your credit score as you take out a new debt consolidation loan. But the long-term effects of debt consolidation are likely to be positive. That is because two of the biggest factors that make up your credit score are your payment history and your utilization ratio. Taking out a debt consolidation loan is likely to help you to pay down your debt and make on-time payments, which should help your credit score.

Are there disadvantages to using a debt consolidation company?

Some companies charge upfront and/or monthly fees to process a debt consolidation. You may be able to avoid these fees by taking out your own debt consolidation loan. However, working with a reputable and accredited debt consolidation company may increase the chances that you follow through on your debt management plan.

Does credit counseling or debt consolidation cost anything?

Different credit counseling or debt consolidation companies have different fee structures, largely depending on whether they are a nonprofit or a for-profit company. Nonprofit companies generally receive most of their funding from grants or donations, which means that the fees they charge (if any) are usually fairly low. Make sure you understand the complete fee structure before you start working with any company.

What should I bring to a credit counseling session?

Once you've decided on a company to work with, you'll want to gather all your relevant financial information. This may include your latest statements from each debt or creditor, information about interest rates, minimum payments and payment dates and your latest paycheck or income statements. The more information you're able to provide, the easier it will be for your credit counseling company to help you come up with a plan to get you out of debt.

The Bottom Line: Nonprofit Debt Relief Companies May Offer Fewer Risks Than For-Profit Companies

If you find that you have a significant amount of debt, you may want to consider debt consolidation. While it’s possible to consolidate your debt on your own, working with a company that specializes in debt relief comes with a few advantages. They may be able to provide advice and support and may even be able to negotiate a better interest rate for your debt consolidation loan than you could get on your own. There are both nonprofit and for-profit debt consolidation companies, and you'll want to research them carefully before you decide on one.

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