There are three common types of debt consolidation: debt consolidation companies, debt management companies, and debt settlement companies.
A debt consolidation company purchases all of a consumer’s debt and the consumer then makes one payment to the company. The benefit of this is that it sometimes lowers the consumer’s interest rate and combines multiple payments into a single payment.
A debt management company is a third party that attempts to negotiate lower interest rates and payments on a consumer’s current debts. A debt settlement company is a third party that attempts to negotiate lower principal balances on a consumer’s current debts.
Although each of the companies provides very different services they are often confused or jumbled together. When conducting an internet search for debt consolidation companies there are limited resources that are produced that exclude debt management and settlement companies because they tend to be more risky and often have a negative effect on consumer finances. Debt consolidation is not without risk but with a consumer’s total debt being purchased and all debts combined into one affordable monthly payment the risk is lower than with other services.
There are methods in which consumers can consolidate their own debts without involvement from a consolidation company but it does require a credit score of 660 or higher anything lower will require the services of a reputable debt consolidation company.
Tips for Finding a Reputable Debt Consolidation Company
- Check with the Better Business Bureau. By checking with The Better Business Bureau consumers may find a lot of companies that are not rated probably because of limited to no available information. However, consumers will be able to see what companies are accredited with the Better Business Bureau, what complaints have been filed against various companies with the Better Business Bureau, and any legal actions that have been taken against various companies.
- Check to see what companies are registered with The Association of Independent Consumer Credit Counseling Agencies or The National Foundation of Credit Counseling.
Reputable companies will make their reputation and customer service a priority and will be associated with some type of governing body. Consumers checking with these two agencies will be able to see what companies are registered as well as any positive or negative feedback associated with the companies.
- Consider services through a nonprofit agency. Just because a company claims to be nonprofit does not automatically make it reputable. A true nonprofit company will have a 501(c) (3) certificate. Although nonprofit companies are less expensive they still have to charge for their services in order to stay in business.
Although, there is no certain way to determine the legitimacy of a company there are signs that consumers can look for:
- They are selling things other than debt consolidation. These companies will market themselves as debt consolidation services but once the consumer is in their office they present other services such lowering the total amounts that are owed and working out deals with lenders. True debt consolidation companies do not negotiate with current lenders they simply transfer a consumer’s debt to a new loan with different terms.
- They are aggressive or pushy. Anytime a consumer is encouraged to make a rash decision the consumer should have concerns because it is very likely that the company is more interested in profits than what is in the best interest of the consumer.
- The company markets a quick fix. Any company that markets their services as a painless and quick process is simply dishonest because getting out of debt is never quick nor is it without some type of sacrifice.
- They make the consumer feel uncomfortable. Consumers considering debt consolidation needs to be comfortable with the companies they have chose because once the agreement is signed it is binding. A good company will listen to their consumers, be honest with their consumers, maintain the consumer’s best interest, and will educate their consumers on making better financial choices in the future.
How to determine if debt consolidation is the right choice
Despite whether a consumer chooses a for-profit or a nonprofit agency there will be applicable fees because neither agency will lend money for free. However, reputable companies will be honest about their fees, interest rates, and terms.
- Fees: a reputable debt consolidation company will be upfront about their fees. Some charge fees upfront while others simply make money off of the interest paid by the consumer.
- Interest Rates: most reputable debt consolidation companies will offer lower interest rates than the consumer was paying but it can vary by company.
- Terms: a reputable debt consolidation company will be upfront about the terms they offer consumers by disclosing interest rates, the length of the services provided, and will disclose if the consumer is going to be paying more in fees and such than simply attempting to take care of the issues personally.
Prior to making such a large decision consumers should weigh the positives and negatives of debt consolidation to determine if it is an answer to a problem or if it will create a bigger problem. This option should only be considered if it is truly a means to an end. If the consumer is going to continue being in debt after the consolidation has ended this is not an option to consider.
Locating a reputable debt consolidation company is possible but at the same time it is difficult because there are many more disreputable companies than reputable ones. It is more important for consumers to do their homework and make a good decision than to make a hasty decision that is regretted later.