Are Debt Consolidation Companies Your Friend?

Debt consolidation is a term that defines the various methods used to organize debt from multiple creditors so that the debt is simpler to monitor and pay. Debt consolidation services may be offered by major banks, from non-profit  companies or from debt consolidation companies.

Debt consolidation companies assist consumers whose debt has skyrocketed out of control by offering debt consolidation and debt settlement services. Debt consolidation services consolidate bills into one low monthly payment. By providing the consumer with one large loan to pay off existing debt, debt consolidation programs eliminate the need for the consumer to make many separate payments to different creditors. Although the monthly payment is usually lower, the repayment period will generally be longer.

Debt negotiation or debt settlement is another service offered by these companies. Debt settlement programs are most often offered to people who cannot handle a debt consolidation program or are in danger of facing bankruptcy. Debt settlement helps consumers negotiate a reduction of their overall debt, but at the price of their credit score. Once the negotiated settlement is agreed upon with the creditors, the debt negotiation company makes a one-time payment to them.

Debt consolidation companies are abundant. To find them, one must simply Google “debt consolidation companies” and the results are overwhelming. They change their names often so it is difficult to keep track.  Many of these companies claim non-profit status but this is very deceiving, as they pay their executives huge salaries or steer consumers to affiliated for-profit companies that make debt-consolidation or home-equity loans.

The list of drawbacks associated with using debt consolidation or debt settlement companies is exhaustive. Below are a few to keep in mind before picking up the phone or searching the Internet for one of these companies:

• If a consumer goes into debt settlement his/her credit score will be adversely affected because the lender is not getting paid back according to the terms of the original agreement signed with them.
• Most debt consolidators build in a fee as part of the monthly payment which is sometimes as high as 10% of the payment.
• In some cases, debt consolidators have skipped or missed payments as a result of administrative errors.
• Consolidation loans are almost always secured loans, whereas credit card loans are unsecured. In other words, you usually have to provide collateral to receive a loan from a debt consolidator. If you use your home as collateral, for instance, failure to make payments to the debt consolidator could result in the loss of your home or whatever asset you have provided to secure the loan. If you did not pay an unsecured credit card loan, however, it would result in a poor credit rating but your home would still be secure.
• For many candidates who turn to debt consolidation, their current situation usually means they will not be able to obtain the lowest available interest rate. Accordingly, debt consolidation companies often entice consumers with a lower monthly payment but the overall interest rate is higher than what they are currently paying. The result is that the consumer pays back the loan over a longer period.

As illustrated above, there are several drawbacks to using the services of a debt consolidation company. There are other viable alternatives which can be implemented to make debt payments more manageable while avoiding the hidden fees and risks associated with debt consolidators. If your debt is comprised of only credit cards, experts suggest rolling it over into one card with a lower rate or one that provides a 0% balance transfer. If you are looking to consolidate different types of loans or looking for cheaper rates than those offered by credit card companies, and you own a home, another alternative is taking out a home equity loan. These loans generally carry a fairly low interest rate, and the interest you do pay is tax-deductible. It should be noted that there are fees associated with a home equity loan including the application or origination fee and the cost of an appraisal. Further, you are stretching payments out over 15 or 30 years.

Other alternatives include taking out a personal loan or negotiating better terms with your creditors which can easily be done by yourself, sometimes over the phone. Finally, consumers can seek advice or help from a true non-profit credit counseling service such as the National Foundation for Credit Counseling (NFCC). NFCC has branches throughout the country and provides free and confidential debt management advice to anyone who needs it.

So are debt consolidation companies your friend?  No, not really and it’s best to avoid the services of debt consolidators. What appears to be a quick fix to a burdensome debt load can quickly become an even bigger expense and headache. If you have the time, think about consolidating debt on your own.