Five Things to Consider Before Hiring Debt Consolidation Companies

1. Debt Consolidation Companies often charge big fees.

Some debt consolidation companies charge high fees, which can add to your overall debt and make it more difficult to pay off. Consumers should carefully review the fees associated with debt consolidation and compare them with other options, such as working directly with creditors or utilizing a nonprofit credit counseling service. Remember: a debt consolidation company can’t guarantee you success. They may take your money and fail to negotiate a settlement, and you may still be stuck with their fees in addition to your other debts. This is something to consider before signing up for debt consolidation.

2. Some plans require lengthy repayment terms.

Some debt consolidation companies offer long repayment terms, which can result in the consumer paying more interest over time. You should consider the total cost of the debt consolidation program, including both the fees and the interest, to determine if it is the best option for your financial situation. You should also think about how long you will remain in debt on a lengthy repayment program and whether something in your circumstances is likely to change during that repayment term (such as a better or worse job in the future and a change of ability to pay).

3. You should consider the impact on your credit score.

Debt consolidation plans often involve intentionally not paying your debt for a period of time to essentially create a more desperate negotiation by the creditors. This will negatively impact your credit score. Other programs have more credit score-friendly approaches, but any time you’re not paying all of a debt back, you should be aware that it may affect your credit. Be sure to ask questions of any sales rep about how the plan they’re proposing will impact your credit and how it could affect your ability to obtain credit in the future. This point is particularly important because damaged credit is one of the biggest reasons consumers choose not to file bankruptcy—which is a better option in most respects. If the consolidation plan will significantly impact your credit, bankruptcy becomes a more attractive alternative.

4. There is a high potential for scamming in the debt consolidation world.

While many debt consolidation companies offer a perfectly legitimate service, there are, unfortunately many scams out there designed to prey on consumers already loaded down with debt. These companies may charge high fees and provide little or no help in managing debt. The “scams” range from mere incompetence to outright dishonesty, but all of them can land you in a worse situation than you started in. Be sure to look up the company you’re dealing with online, read reviews, consider any input by organizations such as the Better Business Bureau, and any other online statements made by others. Be especially wary of companies that make unrealistic promises or require upfront fees, and of companies that pressure you to sign up quickly without time to research and consider.

5. The debt relief through a consolidation plan is limited and may be incomplete.

Debt consolidation may not provide the level of debt relief that consumers are seeking. In some cases, the monthly payments may be higher with debt consolidation than they were before, and the consumer may still struggle to pay off debt. Consumers should carefully evaluate their financial situation and understand the limitations of debt consolidation before utilizing this option.

Furthermore, it’s vital to remember that a debt consolidation company is just that—a company. They can try to negotiate but have no power to force creditors to accept less.