Let’s start with some background: What is a debt consolidation company?
A debt consolidation company takes all of the customers outstanding debt and combines them into one. The customer then only has one payment that is made to the debt consolidation company and the company disperses the payment to the other debtors. Basically the company will work with your other creditors, so you don’t have to. While this may sound appealing, there are a few things you should look into before signing up with a debt consolidation company.
Start with your current debtors. Most of the time they will be willing to work with you and your situation to get your debt taken care of. If you are struggling to make your payments with us at Lift Credit, give us a call! We are willing to work with you directly.
Ask yourself the following questions:
1. Is the company legitimate? Real debt consolidation companies should be able to answer all of your questions, provide you with
2. Do they help you manage money by giving real advice and creating a budget with you?
3. Find out how much working with this company will cost you. Many of these companies want to help you get out of debt but charge you more money to do so. Look for a company that is willing to help with debt for a cheap or even free cost. You should also ask if they are able to negotiate a lower interest rate on your loans.
4. Don’t agree to anything before all services have been offered in writing.
5. Understand the difference between a debt consolidation loan and debt management. Debt management simply pays back your loans for you while debt consolidation rolls your loan into one at a lower rate. Figure out the new interest rate and term of the consolidated loan. Your loan payments might be smaller, but usually you will end up paying back a lot more money because the loan term is spread out.
Dave Ramsey has provided a great example about how this works*
“For example, let’s say you have $30,000 in unsecured debt, including a two-year loan for $10,000 at 12%, and a four-year loan for $20,000 at 10%. Your monthly payment on the $10,000 loan is $517 and $583 on the $20,000 loan, for a total payment of $1,100 per month. The debt consolidation company tells you they have been able to lower your payment to $640 per month and your interest rate to 9% by negotiating with your creditors and rolling the loans together into one. Sounds great, doesn’t it? Who wouldn’t want to pay $460 less per month in payments?
But they don’t tell you that it will now take you six years to pay off the loan. This may not sound that bad to you at first unless you realize how much more you will actually pay in additional payments. You will now pay $46,080 to pay off the new loan vs. $40,392 for the original loans, even with the lower interest rate of 9%. This means you paid $5,688 more for the “lower payment.” Not such a good deal after all. This example shows you why they are in the business — because they make money off of you.”
6. Lastly, make sure the company is actually paying your other lenders on your behalf. You are still responsible for your debt until it has been paid back in full.
Be careful when it comes to debt consolidation companies. Again, if you are currently struggling with paying your loan at Lift Credit, please give us a call! We are more than happy to work with you and set up an arrangement until you get back on your feet.