The allure of someone making all your debt problems disappear is what drives some to pay a debt consolidator a big fee for their services. The promise of an easier road ahead, the disappearance of the seemingly never-ending collection calls, the pink letters in the mail, the embarrassment of a declined credit card at “couples night out,” even the possibility of a knock at the door in the clear sight of neighbors, leads people to search frantically for a solution. They look at balance transfers, home equity loans and even debt consolidation, but the question you should ask is “is debt consolidation right for me?” Before you can know the answer to that question the first question you should ask is “What exactly does a debt consolidator do?” They consolidate your debts into one “EZ payment,” right? Yes and No.
Debt consolidators are the traffic cops for your financial woes. They work with your existing creditors to extend your payback period and lower your rate, but often the price you pay is quite high – 10% or more on your outstanding balance. Here’s the main complication, you need reasonably good credit to get a credit card company to lower your rate and extend your payback period; if you have reasonably good credit you can generally get them to do it yourself, without paying 10 % away. Just call the credit card company and tell them that you want to lower your rate (the subject for another article).
However, many, maybe even the majority of people who are looking at debt consolidation are behind on their monthly debt payments. They are nose high in debt and can barely stay above water. They want someone to take the heavy burden off of them before they go under completely, and have to declare bankruptcy. I would not be overstating the situation to say that these folks are not the favorite of creditors, and creditors are highly concerned about their ability to repay the debt. In this situation, creditors act very aggressively – raising (not lowering) rates and accelerating (not extending) repayment timing.
Debt Consolidation Loans
Another option is a debt consolidation loan. The problem is that debt consolidation loans are often high interest bearing loans, 18, 20, 22% or more – the recipient is deemed high risk. These loans will usually lower your payment, but extend your payback period – adding thousands of dollars of interest expense in the process. These are often called “hard-money loans” aptly named after people who have a hard time getting an unsecured loan.
Where to Begin – Get Your Credit Report
Before you can answer the question, is debt consolidation right for me, you need to know where you stand. Are you a big risk, small risk or a good bet in the eyes of the creditors? Are you able to consolidate all of your debt into one low-interest rate credit card or are you going to have to talk to Luigi the Loan Shark for a “Pay Day Loan?” The answer lies in your credit score. You can get your score for free at annualcreditreport.com. If you’d like to learn more about your score, click the link to read our special report “Improving Your Credit Score.”
Fortunately there is help for those in chronic need. It comes from the National Foundation for Credit Counseling. The NFCC is an organization that is there to help you with your specific problems. You can reach them at http://www.nfcc.org/
Whichever direction you choose to go, it’s important that you start down the road to recovery sooner rather than later. There is no use waiting several more months to start the trip, the debt will not pay itself down and go away – start today.