Researching a Consolidation Company
Debt consolidation is an option that allows you to take your debts and lump them together under one interest rate and make only one payment. This works for some individuals, but not for others. In order to even consider a debt consolidation program you need to have more than one debt. Consolidation loans typically give you a lower monthly payment; however, this will mean extending the length of time you pay on the loan. As a result, you will pay more in interest because your loan will be longer. It is important to shop around for a debt consolidation loan. There are reputable companies as well as companies that are just out to make a dollar at your expense.
A debt consolidation company, just like other creditors, will want information from you in order to determine if you qualify for their services. They should examine your financial situation: income, expenses, and creditors. If they can assist you, they will then attempt to stop charges and lower your interest rates by negotiating with your creditors.
Typically there are two different options in a debt consolidation service.
- Debt Management Plan/Program: The consolidation company will need an overall idea of your financial situation; income, expenses etc., then they will negotiate with your creditors as mentioned above. You will then be responsible for making a monthly payment to the consolidation company that they will then distribute to your creditors. For this plan to work, you must not take on any more debt, and you must make your payments to the consolidation company on a regular basis.
- Debt Settlement: The consolidation company will most likely negotiate a settlement amount with your creditors. Sometimes doing this can cut your balance significantly. A lump sum is typically required to achieve this type of settlement, so it is important to have the requested lump sum at the time of settlement. Fees for a debt settlement may include set-up-fees, administration fees, a percentage of the amount you will save from the settlement, and there may also be tax penalties. Before choosing a debt settlement plan discuss possible tax penalties with a tax professional.
Both of these options can be accomplished with the help of a financial counselor, or by yourself at no cost. Not all creditors will be willing to work with just you, a financial counselor, or even a consolidation company, but it is worth a try! It is important to know that consolidation companies typically do not help with all debt. There are some companies they are contracted to work for and others they are not. Creditors want to get their money back and will usually work with you. However, if you have let your debt go too far, creditors are less likely to accommodate you; for example, if your debt has gone to collections, or if your wages are being garnished.
Researching a Consolidation Company
Before using debt management or consolidation companies research them thoroughly because there has been a lot of abuse in the industry.
- Research the company. Thoroughly examine their web site. Are they approved by the National Foundation for Credit Counseling (NFCC) (www.nfcc.org)? Have they ever gone by another name? If so, contact the Better Business Bureau (www.bbb.org) to see if there have ever been complaints made towards the company.
- Call the company. Call the company to see what information they will tell you about their program. Call more than once, some companies may give different information or not all the information in the first call. More information could also be sent to you through e-mail. As you investigate the company’s program take note of information that varies from one representative to the next. This may be a sign of hidden fees. Do not feel obligated to give any personal information over the phone. Let the representative know you are researching different companies and will not be giving out your personal information until you have decided on a company. Do not be pressured into signing up with their company on the first phone call.
Questions to ask the company when you call
- Are they only internet based, or do they have an office you can visit?
- Are they accredited through the NFCC? If not, see if they have the following criteria. (Even if they are not NFCC accredited they should be meeting these standards.
- Certified counselors
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Voluntary board of directors
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Financial integrity
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Nominal fee structure
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Community representation
- What are their fees?
- Ask for all fees to be disclosed to you with an explanation of each. Inquire about start-up/enrollment fees, monthly fees, late fees, charges per account, and hidden fees.
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Are donations required? Will you be asked to make a voluntary contribution, what defines a voluntary contribution? Some companies are specifically set up as non-profits thus allowing them to write off any donations.
- What kind of payment process do they have? Payments should go from you to the company and then to the creditors.
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Will your first payment be sent to your creditors or will it be kept by the company? If the company will be keeping your first payment you will need to also pay your creditors that first month to avoid late fees and possibly disqualifying yourself from the company’s consolidation plan.
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Inquire if there will be any electronic transfers or direct deposits required, or if payments will be manual. It will be important for you to track everything getting statements or receipts from your bank, the company, and your creditor to ensure that the payments are being made.
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- Can all debts be taken care of through the company, or just the creditors that contribute to the company? Who are those contributors?
- Do they have an interest in helping you as a customer become more financially sound? (Or do they just want your money?) Do they offer any budget or debt counseling? Do they offer financial education courses free of charge?
Choosing to use a consolidation company can be helpful, but there is still a great amount of responsibility for you to ensure that everything is running smoothly. Fraud and mistakes happen. If you are aware of what is going on with your payments and the company, you will be more likely to avoid problems.
If you feel your debt is too large to manage by yourself, contact a local financial counseling agency for help.