Answers to Everything About Debt Consolidation Companies
Debt is one of those dirty four-letter words that no one wants to talk about. Unfortunately, with Americans in so much debt, it is a topic of conversation that should not be avoided. As a whole, we need to work toward getting out of debt.
If you are buried under a mountain of it, don’t feel rained on. You are definitely not alone. And if you are looking for a fast solution- well, you are not alone there either. We all want to get out from under this crushing debt as quickly as we can.
It is that desire that makes debt consolidation companies so profitable. They promise solutions that we could only dream of and before long, we are signed up and excited. Is it worth it? Are debt consolidation companies the answer to our national debt crisis? Let’s take a look:
What Does Debt Consolidation Mean?
Debt consolidation is the act of turning multiple debts into one larger debt. For instance, if you have five debts for $200 each, instead of constantly paying each debt little by little, you would borrow $1000 to pay them all off. Then, you would repay that $1000.
The idea of debt consolidation is to save money- and stress- by only having one payment, theoretically at a lower interest rate. In our example above, let’s say you are currently paying 25 percent on each one of those $200 debts. That means that you are paying out $250 each month on interest alone.
With debt consolidation- the $1000 loan in this case- you might get a lower interest rate of 12 percent. It might also be higher, but there is still a benefit to debt consolidation: You only have one payment and it is usually much lower than your current monthly payments. And, with many of the loans, the interest is fixed into the payment, so every month you are paying toward your principal.
The important thing to remember is that the results you get will depend on your specific debts and the debt consolidation loan that you get. There is one other important fact to take into consideration: As you are taking out a larger loan and making smaller monthly payments, debt consolidation will keep you in debt longer.
We are not a lender, but we can help connect you to a suitable lender:
What Do Debt Consolidation Companies Do?
Debt consolidation companies are basically companies that do the work for you. They sometimes provide the loan themselves or find a loan for you. Others make arrangements with your creditors so that your monthly payments will be lowered. Then, you make a monthly payment to the debt consolidation company you chose, and they split the money among your creditors.
Many debt consolidation companies promise unrealistic results or claim that they can get you lower interest than they actually can. Due to the dishonesty in this industry, the FTC attempts to monitor it closely. If you choose to hire a debt consolidation company, check reviews before making a decision.
Do Debt Consolidation Companies Eliminate My Debt?
No, absolutely not. Debt consolidation companies do not get rid of your debt. They simply restructure it into one monthly payment. In order to eliminate your debt, you have to pay it off. There is no magical solution- no fairy godmother to make it vanish.
Is Bankruptcy a Good Option?
Sure, bankruptcy can erase debt- if you qualify for Chapter 7. If not, you are still paying your debt. The only difference is that you now have a bankruptcy on your credit. Trust me- that’s not what you want.
Before we go any farther, let’s come to terms with this fact: There is no fast and easy way to get out of debt. The sooner you understand the less likely you will be scammed by a company making those promises. If you want to get out of debt, it will take time and work.
Is Debt Consolidation the Same Thing as Debt Settlement?
Again, no. Debt settlement is about getting your balance lowered. Debt settlement companies reach out to your creditors and ask if they will be willing to settle your debt for less than the total amount. Debt settlement does have the potential to help you get out of debt quicker than debt consolidation, though, since debt settlement is lowering your balance and debt consolidation is extending the length of time you will be paying.
Can Debt Consolidation Companies Get Better Terms and Interest than I Can?
The truth is that neither debt consolidation companies nor debt settlement companies can do anything you cannot. In fact, if you choose to consolidate your debts on your own, you might be able to get a much lower interest rate by getting a personal loan. You have the ability to call and speak to your creditors to get a lower balance, as well. Yes, these companies can help you but no more than you can help yourself. You simply need to decide how much effort you are willing to put in.
Can Debt Consolidation Companies Get Me out of Debt Quicker?
We briefly talked about this a moment ago, but let’s get a better understanding. When you consolidate your loan, you are borrowing a larger sum. That larger sum is then repaid in portions every month over a specified period of time.
Depending on the amount you consolidate, that repayment period could be years. So where you could have potentially settled for a lower total or even worked a few extra shifts and paid all of those $200 debts in a few months, you may now be paying those payments for three years.
Part of the allure of using debt consolidation companies is the idea of paying out less each month. The problem is that to get those lower monthly payments, there is a trade-off: You stay in debt longer.
Will Debt Consolidation Companies Save Me Money?
Not likely. In fact, you will probably spend out more money. The longer you pay on your debt, the more interest you have to pay. This could come to thousands more in interest alone while the only benefit you receive is lower monthly payments.
You Pay Debt Consolidation Companies a Fee
You also have to factor in that debt consolidation companies charge a fee for their services, and these can vary greatly. You could end up spending hundreds more just over fees. What good is a lower monthly payment if a large portion is paying the debt consolidation company?
While we are on the subject of fees, you should know that according to the FTC, debt consolidation companies are not allowed to charge fees unless they produce results. Keep this in mind if you choose to speak to one.
What is the Difference Between Debt Consolidation Companies and Debt Management Companies?
Both debt consolidation and debt management companies can help you take control of your debt, but they do it a little differently. With debt management, your counselor will help you develop a repayment plan for your debt.
Unlike debt consolidation, you are not taking out a new loan with debt management. You are simply repaying your debt in an orderly and efficient fashion. Some debt management agencies will help negotiate better terms with your creditors. Others may allow you to send your payment to them, and they distribute it appropriately. Some simply provide the education you need to manage your debt.
Debt management is a good approach as you are not just repaying debt. Through the process, you are learning how to better manage finances so you do not end up in debt again- hopefully. It is also important to note that while you are using a debt management company, you generally cannot open any new lines of credit.
Get Advice on How to Manage Debt Better. Debtry Can Help You.
Do I Have to Hire a Debt Consolidation Company to Get Results?
Absolutely not. As mentioned earlier, there is nothing they can do for you that you cannot potentially do yourself. Of course, if you are not able to get a debt consolidation loan on your own, you may have to consider a debt consolidation program. However, you should do all you can on your own first. Let hiring a company be a last resort- not a first choice.
Will Hiring a Debt Consolidation Company Improve My Credit Score?
This can be a tricky question. In theory, any time you pay off debts your credit score should go up. However, with debt consolidation, you are usually taking out a new loan.
Additionally, many debt consolidation companies require that you stop paying your debts. For several months, you make payments to them and it goes into a savings account. Once that account has enough money in it, they pay the creditor. This means that while that money is just sitting in that account and you are not making payments, your debt is growing and is reported as delinquent to the credit bureau.
Over time, though, as you repay the loan, your credit score should rise. However, you will probably see a big decrease in your score for a while. If you settle debts or pay them off on your own, your score will likely improve by the next month- or whenever the creditor updates the credit bureau. The bottom line is that- again- the debt consolidation companies are not able to do anything you cannot, and that includes improving your credit score. In fact, you have a better shot of improving your score quickly by doing it on your own.
Should I Hire a Debt Consolidation Company?
This is obviously up to you. While I want to tell you to save yourself time and money by doing it yourself, that may not be the best answer for everyone. You should take all aspects of hiring debt consolidation companies into account when making a decision. Let’s think about when hiring a debt consolidation company may be the best choice.
If your total debt is so high that it is already going to take you years to pay it off, consolidating them might help.
If your credit score is too low to get a personal loan, you might have to resort to going through a debt consolidation company.
If you have already tried to settle with your creditors, but your total is still too high for you to handle, hiring a company might be right for you.
There may be other times it would be a good choice, but those three are some of the top reasons you might be better off hiring a debt consolidation company.
What Should I Look for When Hiring a Debt Consolidation Company?
If you decide to go with a debt consolidation company, you should choose that company with care. Earlier, I mentioned checking the companies reviews, but your research should go beyond that. Here are some important things to look for when choosing a company:
Honesty
You want a company that is open and honest with you. Ask as many questions as you need to in order to feel comfortable. This includes asking how exactly the company and the employees get paid. If you ask questions that they try to dodge, you should probably move on. They should also be able to tell you upfront how long you will be paying on your debt through their program. There is no reason why you should be going into a relationship with any company not knowing what to expect.
Taking Care of the Problem
Just addressing the debt itself is like putting a Band-Aid on an open wound. It does not treat the problem- only the symptoms. In other words, getting out of debt does no good if your habits are just going to land you right back in the same hole. Look for a company that provides debt management counseling with the rest of their service. This means that someone will actually take a look at your situation and help you determine where the root problems are. Most non-profit companies do offer this service. The counselors should be state-certified. If they are not, look for another company.
Customer Reviews
Check up on the company through the Better Business Bureau. Not every company has been rated yet, but it is a good place to check. If you cannot find the company on the BBB website, just Google the business name. You should run across mentions and reviews since almost every business is at least mentioned online- if only on social media.
If that business name does not show up in your search results at all, they are either not a real company or have not been in business long. It is hard to know if you can trust a company if there are no customer reviews to look at.
Companies that have been around for years and have happy customers are a definite plus.
Fair Fees
If they ask for fees upfront, back away. As previously stated, the FTC requires that they actually get some results before they can charge fees. If they say you have to pay before they can get to work, move on.
Avoid companies that are attempting to pitch you other products all of the time. You are talking to them to get out of debt- not spend unnecessary money. And if they offer a quick fix or claim that they can settle your debt for a ridiculously low amount, it is probably too good to be true. Remember, there is nothing quick about fixing debt.
Find out about the fees. How much of your monthly payment will actually be going toward your debt? If you will be paying almost as much in fees as you will pay off your debt, move along.
If you literally do not have a spare second in the day to consolidate your own debts or you simply do not want to mess with it at all, hiring someone else to do the work might be your best option.
Conclusion
Debt consolidation companies do have their advantages, so of course, you can benefit from using one. However, those benefits may not be worth the trade-off. Before you jump into hiring one, take some time to really think it through. Seek some wise counsel and talk it over with a friend, family member, or significant other.
If you decide that hiring a debt consolidation company is the best choice for you, go into it knowing that there will be ups and downs. Be vigilant so that you are not taken advantage of. And talk to several companies before choosing one.