Posted on May 20, 2009 at 7:15 am So I have read some great posts on this website about debt consolidation options for people with credit card debt. However, I still do not understand- how exactly do debt consolidation companies make money?

Posted on May 20, 2009 at 7:20 am ErickJ- a very good question indeed. It depends on what type of debt consolidation the company is offering the debtor. For example: If it is a debt consolidation loan, the lender will make their money on the interest charged on the loan itself. For example, if they extend a $10,000 loan to a person so he or she can pay off their debts, they may charge anywhere between 15-25% interest. Interest rates on debt consolidation loans tend do be very high. If it is a debt management company (credit counseling), then they will typically charge a monthly fee that usually ranges between $25-$50 per month. Also, I do know that some debt management companies charge a one time up front ("enrollment") fee. Unfortunately I am not too sure how debt settlement companies make their money exactly, and I do not want to mislead you in any way. I am under the impression that they charge a percentage of what is owed, or at times a percentage of the settlement amount but I am not sure how much or how the fees are structured.

Posted on May 20, 2009 at 7:26 am BigJohn1898 is accurate in terms of debt consolidation loan and credit counseling companies and how they make their money. Debt settlement companies, on average, charge 14-16% of the total debt amount, and the fees are usually sprea dout over 12-18 months and included in the client's monthly payment they are making. Usually the fees are broken down into a retainer fee that is charged over the first 1-5 months of the program, and service fees that are charged over the following 13-17 months. Some debt settlement companies do charge a percentage of the settlement amount. For example, if a $5,000 credit card debt is settled for 50% of the balance, they may take 20% of the settlement amount ($2,500) for their fee.

Posted on May 20, 2009 at 7:53 am Some stuff to add on: -Credit counselors are usually non-profit so they technically don't make money, but that being said they do get kick backs (I heard about 5% of your monthly payment) from the credit card companies themselves for administering a debt management plan.  This kick-back from the credit card companies, known as Fair Share, is actually the largest portion of their funding from everything I've read.  -For debt consolidation loans, the interest is the main way that the lender makes money, but for people who refinance their home to consolidate their debts, they'll also pay a fee to a mortgage broker in many cases.  The origination fee usually is paid from the loan received and will average about 0% to 4% of the loan.  Brokers also get kickbacks from lenders if they are able to convince you to accept a loan with marked up interest, so shop around!  

Posted on May 20, 2009 at 8:11 am Wait- so credit counseling agencies are non-profit? I have seen some for-profit credit counseling companies marketing online. Is this even legal then?

Posted on May 20, 2009 at 8:26 am Yeah it's legal to be a for profit credit counselor.  It's not China. 

Posted on May 22, 2009 at 1:41 pm I heard though that in some states you have to be non-profit to do business there as a credit counseling agency? JimmyBone any insight as to whether or not this is true?  

Posted on May 23, 2009 at 6:08 am Yes, a lot of states have requirements whereby only a non-profit can operate legally as a credit counselor.  Here's a list of those states: Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia and Wyoming So those are states that require non profit status.  There are a ton of other states that limit or cap the fees that credit counseling agencies can charge.  

Posted on May 26, 2009 at 10:36 pm  

Posted on July 7, 2009 at 2:40 pm If you are wondering how do debt consolidation companies make money and are confused by anything on this thread- understand that the way these companies make money depends on what type of company they are. In summation- most credit counseling agencies are non profit (they receive kickbacks from the actual creditors though), while debt settlement companies will charge a percentage of the client's debt amount or a percentage of the settlement amount.