Facing overwhelming debt can lead to hasty decisions. When in fact, it should be a time to slow down and consider your options carefully. In most cases, your choices will be one of four: a consolidation loan, credit counseling, debt settlement or bankruptcy. Of the four, the one we are most focus on in today’s article is consolidation. But stay keen, there are many benefits and potential pitfalls to this strategy. Here’s what to consider when looking for a debt consolidation company.
What is debt consolidation?
If your credit rating is still healthy, this strategy combines your outstanding debts into one loan with a lower interest rate, upon which you make a single payment each month. Combining all your payments into one can make them go farther toward resolving your situation more quickly.
But you must be careful to ensure the monthly payment is less than the sum of the payments you’ll make every month if you continue to pay each account separately. Further, because consolidation loans can require some form of collateral (usually your home), you have to be sure you can handle the payment comfortably, or you could lose your residence.
Choose carefully
Take some time to research the company with which you choose to work. The credit resolution industry is rife with negative reviews. Some of these, such as the Freedom Debt Relief complaints, can lead to companies gaining a poor reputation they feel they don’t deserve. But just like restaurant reviews on Yelp or social media, only the folks most happy or angry are likely to post their thoughts online. This makes it hard to find unbiased advice. Fortunately, there are several key indicators you can observe to determine the nature of a company.
BBB listing
If consumers have lodged complaints against a lender, the Better Business Bureau website will have them listed. The site reflects praise heaped upon the deserving as well. The BBB also lists accreditations in addition to legal actions filed against a company.
Agency affiliations
According to the federal government, two of the most reputable associations in the industry are the Financial Counseling Association of America and the National Foundation of Credit Counseling. If the debt consolidation company you’re considering is affiliated with these organizations and adheres to their standards, you’re likely in good hands.
For-profit vs. non-profit
If you’re working with a company claiming to guarantee your best interests because it’s non-profit, make sure it is. Ask to see their certification.
Beware the bait and switch
Some companies will advertise consolidation loans, then try to pivot you into a less advantageous solution from which they can derive more income. Listen carefully to the details of the deal and get everything in writing. If something sounds wrong, it probably is.
Fast solutions are false solutions
Anyone promising to clear your debt in a matter of months is likely a charlatan. Think about it. Your problem accrued over years so it’s going to take years to unwind it. If you’re feeling rushed, the company probably has a hidden agenda. If it sounds too fast and too easy, talk to a few other companies before you decide what to do.
Consider the interest rate
While the temptation to accept a low payment is great—especially when you’re having money problems—your real concern should be getting the lowest interest rate possible. It’s very possible to disguise a high-interest rate with a longer loan term and lower payments Your goal should be to pay off the loan as soon as possible at the lowest interest rate you can get.
Upfront charges
Most debt consolidation loans carry origination fees and other charges. If you have the cash to deal with them up front, it’s the best way to go. Otherwise, you’ll roll them into the loan and pay interest on them, just as you would on the principal amount you borrow. This will make the total cost of the loan higher.
Knowing what to consider when looking for a debt consolidation company can make all the difference in your quest to be debt free. Consider each of the points above before signing a deal with any lender.
One more thing, if you get the loan and pay off all your outstanding accounts, those zero balances are going to tempt you to shop. Stop for a moment and fully appreciate the pain you’re feeling right now. If you charge again—and have a consolidation loan to pay off—it’s going to feel a lot worse.