Debt Consolidation: Ripoff or Real?

debt consolidation

debt consolidation

Debt consolidation is topic I know a lot about. My husband and I are currently enrolled in a debt management program, just one of many debt consolidation options. When we first started seeking out different options our emotions ranged from being overwhelmed, angry and finally, relieved.

If you don’t do your homework on different debt consolidation options, you could potentially make a bad situation worse. There are many for-profit agencies out there who, unfortunately, do not have your best interests in mind. They’re out to make a buck for themselves and rely on people in desperate financial situations to do so.

Debt Consolidation Loan: Take A Look

The most obvious debt consolidation option, for us anyway, was to go to a bank and look into a consolidation loan. In this option, you approach a bank with all debts you would like to consolidate and apply for a loan at a lower average interest rate than your currently paying. This debt consolidation loan is to be paid off in a set amount of time, usually within one to seven years.

This option can be a great solution if you have multiple accounts (loans, lines of credit or credit cards) that you would like to consolidate into one lump sum payment. It makes managing your finances easier and you end up paying less in interest since you likely wouldn’t use this option unless the interest rate was lower than your current debts.

Consider A Few Factors

There are a few factors to ensure you get the best interest rates available (which can be as low as prime) but the biggest deciding factor will likely be your credit score. The better the score the lower the interest rate and the more you will qualify for. Another reason not to cut up your credit cards!

Unfortunately this was not the ideal option for my husband and I. According to the bank, we were doing well under our current financial situation but didn’t qualify for a loan. Even though in this debt consolidation option the bank opens a new loan and closes all old accounts, according to the bank we simply had too much debt already.

Debt Management Programs

The option we ended up going with was a debt management program. Debt consolidation under a DMP requires going to either a for-profit or not-for-profit agency and have them take over the unsecured debts in question (you cannot consolidate anything secured like a mortgage or co-signed line of credit) by contacting the companies you owe money to and negotiate with them either eliminating or reducing your interest rate.

In this debt consolidation option, the credit counselor acts as a middle man between you and your debtors (credit cards, loan companies, banks). This is where it is very important that you decide to deal with a not-for-profit credit counseling society. Dealing with a not-for-profit company for your debt consolidation ensures that they are working for you and you only.

You and Your Debtors Will Cease Contact

Once you’ve been ‘approved’ to be apart of a DMP, all contact between you and your debtors ceases. The credit counselling agency takes over and negotiates a new (or eliminating) interest rate in faith that the balance will be paid off within six years (max). You then begin paying the DMP instead of individual debts and they divided payments among your debtors as per their agreement with them.

In our DMP if we make no additional payments (which we are) it will take us 4.5 years to pay off our debts with them at a 0% interest rate. Our goal is to be paid off within 36 months.

Go With Non-Profit Debt Consolidation

Though there may be a small administrative fee with a not-for-profit agency, you do not pay them for these services. You do however have to pay for these same services under a for-profit agency. If your finances are at the point of needing credit counseling, additional fees are only going to hurt your efforts and take longer for payoff.

Unfortunately, there are people out there waiting to take advantage of you during a helpless period in your life. If you’re not careful you can very easily get ripped off. Do your homework. Always check their accreditation, their BBB rating and ask around! In today’s world of internet the information you require can likely be found pretty quickly.

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Have you ever consolidated debts under one of these options?