Carrying a load of debt can easily feel like you’re going through life with a black cloud hanging over your head. No matter what you’re doing, stress about the debt can linger in the back of your mind.
So let’s say you see an ad for a company that promises to help you pay off your debt more quickly. “Really?” You may think. “I’ve been trying to pay this off on my own for so long, maybe getting outside help is just the thing to help me finally knock this out of my life.”
This is perfectly understandable, but you have to keep in mind that nothing is ever as easy as it sounds. If you are seriously thinking about going to a debt consolidation company then you’ll need to do your research and find that is honest, or else you could end up in a far worse situation than you ever imagined before!
What is Debt Consolidation?
Companies that want to help you pay off your debt come in many forms. Three of the most common types are: debt consolidation companies, debt management companies, and debt settlement companies.
Companies like this will often market themselves in multiple ways to get you in the door and once you’re there they give you the hard sell on what they really want you to buy. But if debt consolidation is what you want, then make sure you know what it is before you go!
- Debt Consolidation: one person or company purchases all of your debt so that you can make one payment to them – this can allow you to get a lower interest rate than what you are currently paying as well as to simplify your life by getting just one monthly payment
- Debt Management: a third party attempts to negotiate lower interest rates and payments on your current debts
- Debt Settlement: a third party tries to negotiate lower principal balances on your current debts
These sound very different on paper, but once you start searching for a company that offers any of these services, you could find that they instantly become jumbled together.
In fact, as an experiment, try doing what I did and simply enter the phrase “debt consolidation companies” into a search engine. Good luck finding search results that don’t include debt settlement or management companies! Why does this matter? Because debt settlement and debt management can be extremely risky and could have debilitating effects on your finances.
That doesn’t mean debt consolidation doesn’t carry its own risks, but if you consolidate your debt then it means someone else is buying all of your debt and you are paying them back. At that point it’s really up to you to mitigate risk – make those payments every month and you can avoid penalties and an increase in interest rates.
Now that you understand what debt consolidation is, you should know that there are many ways to do it – and most of them you can do on your own without help from a debt consolidation company. To see a list of those options, see Ben’s previous blog post, “Debt Consolidation Programs.”
However, those “do it yourself” debt consolidation options are predicated on having a good credit score. If you’re in a position where your credit score is less than 660, then those options won’t be available and you will need to begin searching for a reputable debt consolidation company. Below, we’ll explain how you can avoid scams and find reputable debt consolidation companies that can hopefully give you a debt consolidation loan with reasonable terms.
Tips for Finding a Reputable Debt Consolidation Company
Unfortunately, there are no quick and easy ways to find out if a debt consolidation company is credible, although we have vetted all the ones in our debt consolidation tool (you can also use ReadyForZero’s savings platform to find one). However, there are a few things you can do quickly to find out if a company is not credible. So start up a search of companies and follow these steps.
- BBB: If you find debt consolidation companies that look like they might be good, type their name into the website of The Better Business Bureau. For example, I did a search of debt relief companies in San Francisco and found that only one of 13 was accredited with the BBB, and it wasn’t even rated. In fact, many of the companies weren’t rated, likely due to lack of information. Of those that were rated, not even one had a higher rating than a C and some even had D’s and F’s. You’ll also find information about complaints made by other consumers and even court cases against the company.
- See if they’re registered: Check to see if any company you’re interested in is registered with The Association of Independent Consumer Credit Counseling Agencies or The National Foundation of Credit Counseling. A reputable company will be concerned about maintaining their reputation and will make it a priority to be registered with one of these agencies. If they are registered, see if there is any feedback given on the company.
- Consider going to a nonprofit – but know that it doesn’t guarantee the company will be reputable. In fact, when you go, ask to see their 501(c)(3) certificate. Some companies claim to be nonprofit when they are not and that certificate is proof that they really are a nonprofit. Keep in mind that nonprofits still have to charge for their services in order to keep the business running and you should compare their fees to for-profit companies to be sure that they are lower. Of course, it’s not all about the fees. Whether nonprofit or for-profit, the company you go with should be one that makes you feel comfortable and meets your needs. One more thing: just like predatory companies will claim to be nonprofit when they’re not, some will also claim to be affiliated with a religious faith in order to more easily gain your trust. So just because you see the name of your religion in the name of the company doesn’t mean they’re reputable! As unthinkable as it is, many of these companies are out to do whatever they can to manipulate you. Don’t ever simply trust a name or a warm and fuzzy website!
Red Flags – How to Avoid Debt Consolidation Scams
So let’s say you’ve followed all of these steps and you’re ready to get out there and meet some of these debt consolidation companies. If you’re paying attention then you can learn a great deal about the legitimacy of a company simply based of your interactions with their representatives in person. As there is no way to guarantee a company is reputable, you’ll need to keep an eye (and ear) out for these red flags.
- They try to sell you something other than debt consolidation. Some companies may claim to offer debt consolidation services just to get you in the door. But then as soon as you’re seated in their office they start talking about ways to lower your full amount owed or work deals out with your lenders. This isn’t debt consolidation. Debt consolidation doesn’t involve negotiating lower balances, it simply involves transferring your debt to a new loan with different terms. If they start talking about negotiating for a lower principal balance with your lenders then you’re actually talking about debt settlement, an act that carries large risks and can really damage your credit score. This should only be seen as a last resort, if ever an option at all.
- They’re pushy or aggressive. Entering into a loan is a big decision. There’s nothing wrong with shopping around in order to find the loan that best fits your needs. If someone is trying to get you to make a decision in one to three days then don’t even think about using that company. They don’t have your best interest in mind, they just want to make a sale.
- They tell you it will be a quick fix. Getting out of debt is never a quick fix. Any company that tells you it will be quick and painless process is flat out lying to you. It can be done but it will take time and diligence on your part.
- If they make you feel uncomfortable in ANY way. Once you enter into a debt consolidation agreement then you can’t get out of it – so this is not a decision to be taken lightly! Take your time and find the company that takes their time to listen to you, has your best interest in mind, and can help you learn how to manage your finances better in the future. Because having your debt consolidated is pointless if you’re going to go further into debt now or in the future. Taking the step to rectify the problem now isn’t enough – you need to make sure you don’t have to deal with it ever again and a good debt consolidation company will stress to you the importance of learning how to manage your finances.
How to Know if Debt Consolidation is Right For You
This decision comes down to numbers. If you go to a debt consolidation company, they will charge you a fee. No one, not even nonprofits, will lend you money for free. Your decision to move forward or not should be based on how the fees impact your bottom line.
- Upfront Fees: a debt consolidation company doesn’t necessarily have to charge you a fee upfront since they make money off of the interest you pay. However, they might so that’s something to consider.
- Interest Rates: a debt consolidation company will ideally offer you a lower interest rate than what you are paying on one or more of your current loans, but…
- Term: how long is the term they are offering you? Even if your interest rate is low and your upfront fee is also low or nonexistent, does that really matter if your term is twice as long? You could end up paying even more than you were before so…
- Do the math: Before you make a decision, add up any upfront fees to the amount of interest you will pay over the whole term of the loan. Then add up the amount of interest you are paying on your outstanding loans in the same amount of time. Which will you end up paying more on – your current debt as is or the new debt consolidation loan?
Now there’s always the possibility that you’ll do the math and find out that the new debt consolidation loan will cost you more money in the long run. If this is the case, you may still be tempted to go with this option simply because the monthly payments might be lower. This option should only be taken if you really and truly can’t pay your bills each month. Otherwise, why pay more? For further information on whether or not you should consolidate your debt, see Ben’s post “Is Debt Consolidation A Good Idea?”
Finding a reputable debt consolidation company is much easier said than done. For every reputable company there are also many predatory ones out to take advantage of people in vulnerable and sometimes desperate situations. They can misrepresent themselves through creative marketing which makes the search for the best debt consolidation company very difficult! Take your time doing your research and making this decision – because once you sign on the dotted line there’s no going back!
If you sign up for ReadyForZero, you’ll get a free online plan for paying off your debt (like a super-powered debt spreadsheet) and you’ll also be eligible for ReadyForZero’s savings platform which can connect you with a reputable debt consolidation lender.
This article is part of our Debt Consolidation Resource Center. If you’re looking for additional information about debt consolidation, be sure to pay a visit!