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As a blogger you receive advertisement/guest post offers from debt consolidation firms. I do receive their pitches regularly. People, in general, think debt consolidation companies are bad, they are loan sharks. The fact is, it’s partially true, they are as bad as credit card companies if you learn to use them they’ll be the helpful ladder for you for coming out of debt.
But, this sector is not as much regulated as the credit card sector so, there are bad companies who adopt fraudulent tactics, giving bad names to debt consolidation industry in general.
If you follow general guidelines, you can take maximum advantage from these debt consolidation companies. Otherwise, if you let loose, you may be ruined. Basically, debt consolidation companies work with certain principles, that you should consolidate all your debts into one single and bigger chunk to better manage them.
They also look for ways to reduce the interest rate on the consolidated loan compared to individual high-interest rate loans. They also negotiate with creditors on your behalf for debt settlement, which results in the lesser amount to be paid than the original loan amount.
But, I am not promoting the debt consolidation industry here. The reason I discussed above is to let you know that debt consolidation does not require playing magic tricks. The best way, obviously, to protect yourself is to consolidate your loans yourself, without external help. You do not need to pay anybody a fee for the work you can do.
Why you should consolidate your debt yourself
- To have complete control of your money.
- To avoid fees imposed by debt consolidation companies.
- To protect yourself from possible fraud.
- Only you can bring the best deal for your money, nobody cares about your money more than you do.
Steps to take for consolidating your debt
First and foremost, the only consolidation is not going to help, you need to save money and allocate that to pay off your debt faster. Adopting a lifestyle to get out of debt is the best way, even more, effective than debt settlement or consolidation.
On the other hand, you should look out for ways to earn extra money in your spare time. Here’s a list of things you can do to consolidate your debts.
1. Make a list – Prepare a list for your creditors, the amount of debt and how much interest you are paying. you should come up with a list similar to the below one.
Secured loans are against your actual property and you may lose them if you can’t pay your loan. Give priority to pay off these loans first.
2. Calculate what interest on the consolidated loan you can afford – Once your list is ready, categorize loans that can be categorized. A mortgage can not be consolidated with other loans unless you go to debt consolidation companies. Better, take advantage of Federal home loan modification program, Bank of America started offering their program recently.
You may want to sell off your car and pay back your car loan with the proceed. If the car is a must have for you, go for a used lower-end car.
3. Negotiate with creditors – For unsecured loans, you can always negotiate with creditors. his is because your creditors would not get anything if you can’t pay. They develop a risk model taking a minimum default rate into consideration. Most of the credit card issuers offer a hardship program, you just need to call them and get enrolled. In return you’ll get lower interest rate advantage, they even lower your minimum dues per month.
You should try to negotiate beneficial terms for your high balance and high-interest rate debts first.
4. Watch for balance transfer offer – There are a number of balance transfer credit cards out there that offer o% interest for first few months. Take advantage of the offer. you can apply for one such card and transfer balances from old cards. Although you need to pay an upfront fee, you still will do better because of the lower interest.
Just don’t keep on transferring balance. Pay off the money you owe as soon as possible.
5. Borrow money at better term – You can borrow money through home equity, personal loan or even through social lending sites like Lending club or Prosper. If your credit card APR rate is, say, 15% – then you can borrow through one of these routes at a lower rate, and pay off the credit card debt.
6. Ask people to help – I heard stories of parents helping their sons/daughters by lending money. This could be the cheapest source for your loan. Even borrowing smaller amounts from your co-workers could be beneficial compared to borrowing money from your retirement fund. Be careful while you ask your friends and colleagues, relationships get ruined if you can’t pay back.
7. Your retirement fund – Although I vehemently oppose using retirement fund for paying off debt, when living becomes tough you don’t have better alternatives. Good thing is, if you are still keeping your job, you can repay your 401(k) or IRA fund later. If you have to repay at 5% rate then paying off a 10% credit card debt from retirement fund is a wise decision.
On the other hand, if you do not have time or resources to do the tasks, what should you do?
The answer is – choose a right creditor whom you can trust. I have heard both sides of the story. I have heard stories where people worked with a debt consolidation firm and successfully got over their debt.
I also heard stories where debt consolidation companies actually acted like loan sharks and accused of late/no payment even after paying dues on a regular basis. Debt is number one stress among us, don’t aggravate your stress by choosing a wrong company. They can strip you off your money.
The debt settlement companies or attorneys have to comply with the state and federal laws. They get penalized for violating the FTC laws. Any violation can be reported to authorities. Beware of their shady practices and stealing, read reviews online thoroughly before you take their help, if you can’t absolutely do it alone.
The ways to determine fraudsters among debt consolidation companies
- Read reviews at online forums, do not rely on blog posts, these may have been paid articles to promote fraudulent companies.
- Call up agencies like Better Business Bureau (BBB) and check the credentials.
- Do not agree to hire them on the basis of a phone call, verify their address, phone number, and past records before sending any payment.
- Asking for a huge fee up front towards application/registration is a red sign. Do not close the deal!
- Check with your original creditors if they are going to transfer your loan to these companies.
- Too much pitching for your money is a sign of caution, be careful!
This was not a paid post to promote any company. These are the facts that I believe in. People are getting fooled everyday, this post is to increase awareness to help them.
Readers, care to share your experience if you happen to work with any debt consolidation company? How was your experience?
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Lots of great tips. You could also try snowballing paying off debts starting with paying off debts one at a time on your list whil making minimum payments on the others, then adding the minimum payment from paid off debts to the next debt on the list. You would be amazed at how fast you can pay off debt this way. I’ll discuss this in my Brilliant Finances Basic Training series.
I don’t think debt consolidation companies are evil or anything like that, they are just like any other company in the world – in it for the coin. I think if you can do it yourself – and if you have the discipline – then why not?
One thing to keep in mind is that while you can certainly try to negotiate a lower interest rate with your creditors, many of them will decline to do so. I attempted to do so before enrolling in a debt management plan, and they all but laughed in my face. And while some credit card companies do offer hardship programs, not all do. And those that do have hardship programs only offer them for short periods of time (1 year) – which is typically not enough time for your average person in debt trouble to pay it off.
These were two of the contributing factors to my needing to seek out debt relief help……
I think snowballing your debt is a better solution. I’ve seen many people do a debt consolidation, and go back to their bank a year later to do another debt consolidation. Some people don’t change their behaviours, which cause them to go back into debt again.
While this is a great guide to debt consolidation, I think that, for most people most of the time, a Debt Management Plan is a superior solution. In my experience, people interested in debt consolidation are wanting to postpone the ‘day of reckoning’ with respect to their debt challenges rather than tackle the problem. With a DMP, you’ve got a plan to be debt free within 5 years.
I was paying 25% interest on 20,000 on a credit card, and I was still scared of these debt consolidation places. I bet I could have saved money, but their ads on the radio are just SO SLEAZY.
These are good tips for anyone considering debt consolidation. Unfortunately there are a lot of scam companies out there but some that really do want to help. The key is finding the good ones.
Good tips here. While I personally haven’t had experience with such issues, I think that there are probably companies that fit across the spectrum of good to not so good all the way to helpful. As with many areas of debt help, be careful!
I actually manage a debt consolidation company and it is very difficult to build trust with people because of the negative image these companies have portrayed. I also find it difficult to get bloggers to give me the time of day when I try yo promote my business in an ethical and informative manner.
The truth is that debt consolidation CAN help to reduce high interest payments and in many cases it can lower the monthly repayments – something which many people need to avoid getting further in to debt.
On the flip side, you probably will pay the debt for longer and possibly pay more in total. Then there’s the danger of using your credit cards again.
Short answer: it works if you can adjust your lifestyle, willpower and budget. Many people can’t do that, which is why you hear these horror stories about consolidation loans gone wrong.
Wouldn’t it be nice if debt consolidation companies actually put out unbiased, free advice that might even say, “Hey, if you can’t handle a budget or your monthly income fluctuates hugely, then this probably isn’t the best option for you right now.”
That’s what I’m trying to do, but it’s tough going. 🙂
back in my bad days, I got a credit consolidation loan. However, I hadn’t changed my habits yet and maxed out my credit cards again within a year. So that loan simply gave me an opportunity to DOUBLE my consumer debt.
Awesome set of tips! As someone who has been there, I can say that there are definitely a lot of great consolidation companies, but there are also a lot of bad ones. In my case, I took out a loan to consolidate credit card debt – it would have been a great money-saving solution if I hadn’t continued using the credit cards. :/
I think the most important thing is to research carefully and commit to a definite plan for getting the debt paid off without taking on new debt. Unfortunately, many times it seems that people looking to consolidate aren’t ready to change their financial habits just yet (or at least that has been my experience).
GREAT resource here! I also love how you address the “what if you don’t have time to DIY” quandary – because a lot of people just don’t have the time.
Oh and you did have time to over spend previously though!
This is good. This is just like the snowball debt management technique. Do it yourself and you do not have to pay any more creditors/debt managers.
Thank you for sharing 🙂
Regards
.A-
Stay away from debt consolidation. My sister was in a similar situation and ended up consolidating debt without changing overspending habits and got in worse. In the end the solution was to go to a free debt counselling service (in ireland this is a government run service) and these negotiated repayment terms on all her debts for her, (effectively no new interest will accrue, and she pays off a small amount if her arrears every month).
This has allowed her to live again, but her credit score is irreparably damaged, and she will continue to repay these debts for 40+ years (You cannot wipe personal debts through bankruptcy in Ireland)
Are you thinking about using a debt reduction program, but not sure how to find a company that is reputable, honest, trustworthy, will save you money and won’t rip you off?”
There are more people than ever before turning to debt reduction as a solution to pay back what is owed for what you can afford. There are so many companies today advertising on TV, the radio, print, and on the internet that I want to shed some light on really what is and what is not possible with debt reduction.