A U.S. News & World Report survey of more than 1,000 people who took out a debt consolidation loan found more than 60 percent were glad they opted for this strategy.
Consolidating your debt offers some definite benefits. First, you usually have only one payment instead of many. Second, debt consolidation can lead to a lower interest rate. This helps you pay off debt and build a better credit score more quickly.
Debt consolidation businesses have popped up in recent years offering services to people with debt problems.
1. Know debt relief laws and options before hiring any debt consolidation company
First, it’s important to know the difference between debt consolidation and debt settlement. With a debt consolidation program, a company notifies your creditors and negotiates the fees and payment. You make one payment to the debt consolidation company and then they distribute that amount to your creditors. Debt consolidation is good for unsecured debts, such as credit cards, personal loans, student loans, and medical bills.
In contrast, a debt settlement company takes the money you would have paid to your creditors and holds those funds in an escrow account until each creditor agrees to a settlement amount. However, your accounts become delinquent in the process because no payment is made. This is why debt consolidation is often the better choice.
Even so, you need to be familiar with the debt relief laws that protect you from shady companies out there. Here’s what you need to know:
- Lenders cannot make untrue claims or false promises about what they can do for you.
- Federal law prohibits debt consolidation companies from taking their fees upfront. They have to fold those fees into your monthly payment plan.
- Debt consolidation firms must be transparent about the fees they charge. Many states have also placed a cap on these fees, while some have banned for-profit consolidation companies.
- A debt consolidation company cannot demand payment from you until it has a structured payment plan and creditor agreement in place.
- Also, check your state laws on debt consolidation programs and companies.
2. Verify the company’s qualification
It’s important that you ensure the debt consolidation company you select is a legitimate business that has been approved by certain agencies and organizations. Here’s what to look for:
- The agency is a nonprofit organization. You can check with your state’s charity regulatory organization to verify this status.
- Look for agencies that are accredited by the National Foundation for Credit Counseling, the Financial Counseling Association of America, the Council on Accreditation, or the International Organization for Standardization. Debt consolidation companies often list accreditations on their website, but it’s better to go directly to these agencies to verify.
- Look at the Better Business Bureau (BBB) site to see if there are any complaints against the debt consolidation company. The BBB also maintains a rating for each business based on its ability to meet stringent ethical business standards.
- Confirm that they are licensed in your state. You can search online or verify it with agencies such as the Attorney General’s office. Certain states like Florida and Maryland don’t require this type of licensing.
3. Check if the company offers a free consultation and realistic solutions
If you’ve done your homework and ensured the debt consolidation agency is a nonprofit, then you more than likely will get a free consultation. That free session will help you assess whether you can work with this company and is an important first step to ensure the rest of the process goes smoothly.
Ask about what the company plans to do to bring relief to you without creating delinquencies that might further mar your credit rating. You want to work with a debt consolidation partner that has a clear strategy with actionable steps. That way, you can gain peace of mind knowing there is a viable solution that will help you achieve financial freedom.
4. Research customer reviews and company history for lawsuits and complaints
Although you may be a good judge of character and believe that the debt consolidation company has your best interests in mind, it helps to get reassurance from others who have already used their services.
Third-party reviews are a good place to start, especially if you want to remain anonymous about your struggle with debt. You can search for “debt consolidation company reviews” or “debt negotiator reviews” online.
Sites like Google and Yelp may provide valuable insights from others about what it was like to work with the company you’ve selected. Just remember that anyone can write reviews, so you’ll need to consider whether their comments are genuine. Compare the number of good and bad reviews before making a decision.
If you feel comfortable doing so, you may also want to check with family members, friends, or colleagues to see if they have any recommendations.
5. Compare service costs
Service costs should be minimal and may even be the same across debt consolidation companies. Make sure each company is transparent about the amount and what the fees cover.
If you find that the service costs are the same, then you can start to factor in other things like the level of detail in the company’s customized debt consolidation strategy, its response time and interaction with you, reviews, and any referrals you’ve received.
Is Debt Consolidation Right For Me?
Besides working with a debt consolidation company, you can go it alone by using other debt consolidation strategies, including a home equity loan or line of credit, credit card balance transfer, or another type of loan. Consider the value of working with a debt consolidation company that has the expertise to efficiently consolidate your debt and handle the negotiations for you. It can also offer support and advice to steer you toward the best financial options for clearing your debt.
Debt consolidation will still take time and may continue to feel stressful. However, this debt elimination strategy maybe the solution you need to clear the mounting debt. Know your rights and what to look for, explore the options, and do the comprehensive research to ensure you’ve made the right decision.
