With so many people finding themselves in financial straits, debt consolidation companies offer what appears to be a lifesaving alternative. Unfortunately, there are many reasons for the average consumer to approach these firms with caution.
Consolidation May Not Actually Help
For people who have very high balances, or many creditors, trying to pay all of them through debt consolidation may not work. For instance, if you owe $2,000 each on five credit cards, trying to put all of these companies into one proverbial pot and draw out one payment for them all is going to be difficult. Bankruptcy may be a better choice for anyone who owes $10,000 or more, especially if income has been cut off due to illness or unemployment.
The Collection Calls May Not Stop
While debt consolidation firms work on an agreement with your creditors, they request that you stop paying your bills. This does not stop the collection activity on your account, which will continue to escalate until an agreement has been reached. This means you can actually be sued during the time it takes to set up the consolidation agreement. Meanwhile, your credit scores can plummet.
Debt Consolidation Results in Added Fees
You pay fees to the consolidation company for their services, which could be going towards paying off your bills. There is a wide range of percentages, with some companies charging as little as 4% of your total debt, or as much as 15%. Creditors are usually more amenable to making a deal or setting up a payment plan directly with the consumer. It establishes good faith between the parties, without involving a third party to the equation. This brings us to the next reason debt consolidation companies don’t work for everyone.
Most Creditors Dislike Debt Consolidation Groups
Creditors hate debt consolidation companies and will put road blocks in your way. There are a few reasons that creditors don’t like these companies. First, they take a long time to actually make an agreement, and they have to do it for all of your creditors before any of the creditors receive payment. Also, there is a high rate of consumers who start off on a plan but aren’t able to complete the payments. Some credit card companies actually have rules against dealing with debt consolidation companies.
They Don’t Follow Through
Getting you to sign up for the service is much more important than monitoring your account and getting things done quickly. These firms make their money on the amount of people that they can sign up. Whether or not their customers make it through the program successfully is a secondary concern. They generally employ salespeople to discuss accounts with customers, and they rarely have any training or experience regarding finance.
While debt consolidation sounds like a good way to deal with money problems, its doubtful that one of these companies can negotiate better terms for a customer than they could negotiate for themselves. Make sure you weight the pros and cons before agreeing to deal with a debt consolidation company. You may be better off dealing with your creditors on your own.
About the Author: Lori Titus is a full-time writer and blogger who especially enjoys writing about personal finance. She also enjoys writing about healthcare and related careers, billing and coding schools, and fitness.