Debt consolidation is a popular option for those looking to manage high amounts of debt. Debt consolidation companies provide services to help consolidate multiple debts into one new loan with better terms. This comprehensive guide covers everything you need to know about using debt consolidation companies to take control of your finances.
What is Debt Consolidation?
Debt consolidation involves taking out a new loan to pay off multiple existing debts. This allows you to combine all your debt payments into one lower monthly payment. Debt consolidation companies provide debt consolidation loans and can also provide credit counseling services.
The goal of debt consolidation is to simplify debt repayment and often reduce interest rates. This helps make debt more manageable both in terms of monthly payments and total interest paid over the life of the loan.
Benefits of Using a Debt Consolidation Company
There are many benefits to using a debt consolidation company compared to trying to consolidate debt yourself:
- Access to lower interest rates: Debt consolidation companies have relationships with lenders and can access loans with competitive interest rates. This saves you money on interest.
- One monthly payment: Consolidating multiple debts into one new loan means you only have one lower monthly payment to manage instead of keeping track of several.
- Fixed interest rate: Most debt consolidation loans have fixed rates, which protect you from rate hikes over the loan term.
- Lower monthly payments: Consolidating debt with a longer loan term can significantly reduce your monthly payments.
- Improved credit score: Successfully repaying your consolidated loan can improve your credit utilization ratio and ultimately your credit scores.
- Credit counseling: Many debt consolidation companies provide credit counseling services to help improve financial literacy.
- Debt management plans: Some companies offer debt management plans (DMPs) to simplify payments to creditors if debt consolidation loans aren’t an option.
How Do Debt Consolidation Companies Work?
Debt consolidation companies work in a few different ways to help consolidate debt:
- Debt consolidation loans: The most common option is a debt consolidation loan which pays off existing debts and consolidates them into one new loan.
- Balance transfer credit cards: Some companies facilitate balance transfers from high-interest credit cards onto a new low-interest card.
- Debt management plans: For those who don’t qualify for new financing, a DMP organizes agreed-upon monthly payments to creditors and simplifies the process.
- Credit counseling services: Most companies provide credit counseling to help clients improve financial literacy and budgeting habits along with debt relief services.
The debt consolidation process typically involves a free consultation, credit check, review of options, application for a loan or other service, paying off existing accounts, and managing the new consolidated debt.
Types of Debt That Can Be Consolidated
Many types of unsecured debt can be consolidated, including:
- Credit cards
- Payday loans
- Medical bills
- Personal loans
- Collections accounts
However, federal student loans and tax debt cannot be consolidated through these private companies. Mortgages and auto loans are secured debt that would require separate processes not offered by debt consolidation companies.
What Credit Score Is Needed?
Each debt consolidation company will have its own minimum credit score requirements that depend on the services offered:
- Debt consolidation loans: Scores of 580 to 650 are often needed for approval. Those with scores under 580 may need to improve their credit first.
- Balance transfer credit cards: Scores around 660 or higher are generally required for the best balance transfer terms.
- Debt management plans: No minimum score, but you must have sufficient income relative to debt levels.
Even if you don’t meet the minimum score for a debt consolidation loan, debt consolidation companies can help you improve your credit to qualify in the future.
Costs, Fees, and Interest Rates
There are a few types of costs and fees to consider with debt consolidation:
- Interest rates: APRs for debt consolidation loans are typically anywhere from 5% to 25%, depending on your creditworthiness. An excellent credit score gets lower rates.
- Origination fees: Some lenders may charge 0% to 8% origination fees on the total loan amount.
- Balance transfer fees: Fees are usually 3% to 5% of the total amount transferred to a new credit card.
- Late fees: If you miss payments, late fees from $15 to $30 are common.
- Debt management fees: DMP enrollment fees average $75 and monthly service fees are around $25.
Always compare total interest costs and fees from multiple companies. Avoid high upfront fees when possible.
The Debt Consolidation Process Step-By-Step
The process for consolidating debt with a debt consolidation company generally includes:
- Research companies: Compare multiple reputable providers based on services, fees, costs, reviews, and experience. Resources like the Better Business Bureau can help spot red flags.
- Free consultation: Speak to a representative to have your financial situation evaluated and determine the best debt consolidation options.
- Credit check: The company will check your credit history and scores to see if you pre-qualify. Soft credit checks don’t impact your scores.
- Review options: If you qualify, they will present your debt consolidation loan offers and terms. If not, discuss alternate options like a debt management plan.
- Application: To move forward, you complete an application for the loan or service, which often includes agreeing to credit counseling.
- Account verification: Provide details on all your current debts to be consolidated for verification.
- Consolidated payment: If approved, the company pays off your debt accounts and establishes your new consolidated payment schedule.
- New loan servicing: Make your new monthly consolidated payment on time each month. You work directly with the debt consolidation servicer going forward.
- Credit counseling: Work with credit counselors throughout the process to build financial skills and improve your credit.
Sticking to the payment schedule is essential to successfully repaying the consolidated debt without further issues.
Tips for Choosing the Best Debt Consolidation Company
It’s important to research multiple companies to find the right fit:
- Compare interest rates, fees, loan terms, and eligibility criteria
- Check their Better Business Bureau rating and online reviews
- Verify they are transparent about costs, risks, and alternative options
- Ask about credit counseling and other services they provide
- See if they charge any penalties for early repayment
- Choose an accredited company that follows best practices
The best debt consolidation companies help improve your finances over the long term, not just in the short term. Avoid false promises and high pressure sales tactics.
Pros and Cons of Debt Consolidation to Consider
There are many advantages but also some drawbacks to weigh:
- Lower monthly payments
- One fixed interest rate
- Simpler debt repayment
- Possible lower interest costs
- Helps avoid bankruptcy
- Improves credit utilization
- Closing accounts can temporarily lower credit score
- Debts not paid off as aggressively
- Potential higher costs if extending repayment term
- Discipline required to not accumulate more debt
- Fees for missed payments
- Possibility of lower credit limits
Overall, the pros often outweigh the cons, but each individual situation is different. Examine your options carefully.
Risks and Warnings to Be Aware Of
While most debt consolidation companies are legitimate, borrowers should be cautious of:
- Unexpected fees or rate hikes
- Pressure to enroll in unwanted services
- Making the consolidation process seem fast and easy
- Not clearly explaining loan terms and conditions
- Requiring upfront fees before services are rendered
- Overpromising on the ability to improve credit scores
- Failing to provide credit counseling and other resources
- Lacking proper licensing and accreditation
Avoid debt relief scams by working only with reputable, transparent companies. Don’t fall for unrealistic promises that seem too good to be true.
Alternatives to Debt Consolidation Companies
Other options beyond debt consolidation companies include:
- Credit counseling agencies – Provide free consultations and education.
- DIY debt consolidation – Open a new personal loan or 0% APR card yourself.
- Debt settlement – Negotiating directly with creditors for lower payoffs.
- Bankruptcy – Court supervised debt elimination, but damages credit.
- Home equity loan – Leveraging home equity, but with risks.
- Budgeting and austerity – Creating a tight budget and aggressively cutting costs.
Compare all pros and cons before deciding the best path for your financial situation.
Common Questions About Debt Consolidation
Can debt consolidation hurt your credit?
It may result in a small temporary drop from closing old accounts and getting hard inquiries from new applications, but if payments are made on time, the impact should be positive overall.
Does debt consolidation require collateral?
No, unsecured personal debt consolidation loans do not require collateral like a house or car.
How can you stop debt consolidation calls?
You can opt out of pre-approved offers by calling 1-888-5-OPTOUT or visiting www.optoutprescreen.com.
Can debt consolidation lower your monthly payments?
Yes, extending the repayment term allows for smaller monthly payments, but it also increases the total interest paid over time.
How does the National Debt Relief program work?
It facilitates debt settlement where they negotiate lower payoffs directly with your creditors. Fees apply.
Key Takeaways on Debt Consolidation Companies
- Debt consolidation companies can simplify debt repayment through various means including debt consolidation loans, balance transfers, and debt management plans.
- Consolidating multiple high-interest debts into one new loan can provide a lower fixed interest rate and reduce monthly payments.
- Check credit score eligibility requirements first and compare all costs, fees, and terms between reputable companies.
- Credit counseling services are a major benefit that can help you improve financial literacy and budgeting skills.
- Make sure to carefully consider both the advantages and potential drawbacks before pursuing debt consolidation.
- Avoid debt relief scams by conducting thorough research and reading reviews before choosing a trustworthy debt consolidation company.
Using a debt consolidation company can be a smart strategy to streamline debt and accelerate repayment if you select the right option for your needs and situation. Approach the process carefully and use credit counseling to build sustainable financial habits.