Saving up to get out of debt is a great idea; however, sometimes saving isn’t enough. If you’re curious about your options for debt consolidation, read on.
Not all debt consolidation companies are equal. However, if you’ve been researching your debt consolidation options, it might be difficult to realize that.
Most debt consolidation companies “look” to be about the same. They all have similar sounding names, throwing around words such as “consolidated” and “relief” in just about every combination imaginable. They all make similar sounding promises to guide you to the light at the end of the tunnel when it comes to your debt. They all want to reassure you that yes, you can trust them.
Despite all of these similarities, though, there can be huge differences between debt consolidation companies. It’s vital that you’re able to get a handle on the differences so that you can make a wise, informed decision about debt consolidation and your financial future. We put this guide together to help you select the debt consolidation company that’s right for you.
What kind of debt consolidation do you need?
Many people don’t realize that there are several types of services out there labeled “debt consolidation.” These services are very different from each other, sharing only one common quality: enabling you to consolidate your debt payments into one easy monthly payment through some means. That’s about where the similarities end.
The first step in choosing the debt consolidation company that’s right for you is to figure out exactly what you’re looking for. Broadly, there are three services commonly called “debt consolidation” by companies: personal loans, balance transfer credit cards, and debt settlement.
Personal loans for debt consolidation
When you take out a personal loan to consolidate your debt, you work with a lender to lock down a loan that’s equal to the amount of money you owe on your various debts. You use that loan to pay off all those debts at once, and then switch focus to keeping up with that one loan payment.
Generally, the lender you work with is a bank or a credit union, although other types of lenders exist that are willing to lend to individuals who are trying to get out of debt.
Personal loans for debt consolidation are what most people think of when they think of debt consolidation because they’re popular and easy to wrap your head around. On paper, they seem good and are in many ways. You consolidate your payments and then work to pay off a single loan, likely at a lower interest rate and with lower monthly payments. It sounds like an ideal solution to debt.
You should be wary of a few things, though. Firstly, debt consolidation loans can be difficult to get with bad credit, and even if you do gain approval, the terms may not be friendly. They also treat the symptoms of your debt, not the causes. If you take out a debt consolidation loan and then go right back to overspending with credit, you’re going to dig a much deeper hole for yourself in the long run.
Balance transfer credit cards
Some label certain types of credit cards as debt consolidation solutions. These balance transfer credit cards are the same as other credit cards, except for one key difference: the 0% (or low) introductory APR offer.
A 0% introductory APR means that, for a limited period of time when you first open up the credit card, you won’t be charged interest on your total balance. For a credit card company, this is incentive for an individual to use the card and run up the balance. For someone seeking debt consolidation, it’s a chance to get a head start on paying down debt without simply throwing money at interest each month.
Once approved for the card, you use it to pay off all of your other debts, consolidating them onto a single card. Then, you do everything you can to pay off that balance, or as much of that balance as possible, before the introductory offer ends. Since no interest is accruing, every dollar you pay each month comes right off the balance.
Balance transfer credit cards share many pitfalls with debt consolidation loans, though. You still need to gain approval for them (which can be difficult with bad credit), and you need to be able to control your spending. Paying down your debt in this situation means that you’ll also be freeing up credit. You need to stay focused in the race against the clock, trying to pay off as much as you can before you start to accrue interest.
Many debt settlement companies also advertise their services as debt consolidation. While these services allow you to consolidate into a single monthly payment, the similarities end there.
Debt settlement companies serve as an intermediary between you and your creditors. Their goal is to negotiate on your behalf, asking your creditors to accept a lower overall payment on the debt that you owe.
In some cases, you have to stop paying your creditors and start paying into a designated savings account managed by the debt settlement company. Once there’s enough money in that savings account, the debt settlement company will approach your creditors with a deal: take a lump payment for a portion of the debt now and forgive the rest. Your creditors, seeing an opportunity to recoup some of its money, might take the deal, and you’ll be free from that debt.
There is no guarantee that debt settlement will work, and not all debt settlement companies have your best interests in mind. If you can find the right one, though, you’ll have a partner that’s dedicated to helping you get out of debt, one that will be right there with you, guiding you through the process.
How do you evaluate a debt consolidation company and its offer?
Once you’ve figured out which type of debt consolidation you’re interested in pursuing, you need to be able to compare apples to apples and figure out which debt consolidation company is offering you the best deal.
While each debt consolidation package focuses on an individual’s unique situation, you can look for some common things that will help you to make your decision.
For a debt consolidation loan, is it secured or unsecured?
Most personal loans come in one of two forms: secured or unsecured. With unsecured loans, the lender lends to you based on your creditworthiness. It looks at your credit score, financial history, and a host of other measures to determine if you’re a good investment.
With secured loans, though, the lender asks you to put down some form of significant collateral on the loan. That collateral can be any major asset, such as your car or your house, as long as it satisfies the lender. If you can’t keep up with your payments, the lender can legally seize that collateral, making some of its money back. In that sense, the collateral is security to the lender for an otherwise risky investment.
While secured loans often come with lower interest rates and other incentives, you should be very cautious about taking out a secured debt consolidation loan. Chances are, if you’re taking one out in the first place, you might not have a great track record with managing your finances. The last thing you want is to fall behind, lose your home or car, and still owe some form of debt.
With a balance transfer credit card, can you pay off your balance within the introductory offer period?
With a balance transfer credit card, you’re in a race against time, and in a way, the credit card company is betting against you. It makes money when you carry a balance on your card that you have to pay interest on. The 0% introductory APR offer is only there to hook you. It’s up to you to make the most of it.
Before diving headfirst into applying for balance transfer credit cards, then, you should do a little bit of math. Add up the sum total of all the debt you’d like to consolidate as it stands now. Then, divide it by the number of months during which the introductory APR applies. That number is how much you’ll need to pay each month to zero out your balance before you start accruing interest again.
Can you afford it? Can you at least afford to make a healthy dent in it? If so, then the balance transfer credit card might work. However, if you can’t, then be wary, since all you’ll be doing is moving credit from one card to another.
How do you determine which debt consolidation company to trust?
Unlike the other two forms of debt consolidation we’ve talked about, debt settlement is not a concrete do-it-yourself process. It requires you to choose a partner that you can rely on to make sound decisions on your behalf and provide guidance when you need it most. The most important question you can ask yourself, then, is this: Can I trust this debt settlement company to get the job done?
Unfortunately, there are many ineffective debt settlement companies out there. Even worse, there are untrustworthy debt settlement companies that take advantage of vulnerable debtors. If you’re considering debt settlement, ask yourself (and them) a few questions before you make any decisions.
First, does the debt settlement company seem legit? Does it make promises that seem too good to be true, such as guaranteeing to eliminate your debt in an incredibly short timeframe at little or no cost to you? Do advertisements seem more concerned about wowing you than informing you?
Second, does the company seem in a hurry to separate you from your money? Most have some sort of fee for their services, but lesser debt settlement companies often demand large upfront fees before doing a lick of work on your behalf. They’ll tell you that this fee is necessary to begin their work. Just bear in mind that paying the fee eliminates the company’s incentive to do anything in a hurry, as it already has your money!
Third, what does the company’s track record look like? What kind of information can you independently verify? You should take every claim it makes about its effectiveness with a grain of salt. After all, it is trying to sell you on its services.
Rather, you should rely on independent third-party sources to give you a glimpse into how the debt settlement company does business. First, check to see if the company has accreditation in any way from any organization that seems to be trustworthy. While there are plenty of accreditation organizations out there, the one most people know is the Better Business Bureau. Find the company on the BBB site, if possible. Is it accredited? What’s its rating? Are there unaddressed complaints filed against it? This information should give you a glimpse into how it does business.
Second, try to find some reliable, authentic reviews on independent sites from real customers who have done business with the debt settlement company you’re considering. Choose a company whose reviews are primarily success stories. However, take heed of both good and bad reviews, checking not only the ratings but the comments as well. Real comments from real customers are very helpful when it comes to learning about what it’s like to deal with a particular company. In the end, you’ll likely have found an experienced partner that can guide you through the process of becoming debt-free.