For too many people are drowning in a sea of debt, with little hope of being rescued. You might hear the word debt consolidation, but do you really know “what is debt consolidation”? It is a very scary feeling coming to the realization that you are over your head in debt, and will not be able to make next month’s payment. This is probably the moment where you see an ad for a debt consolidation firm while watching television, or even get a phone call from a company telling you they can solve all of your problems.
The question is; are these debt consolidation firms for real? Can they really help you save thousands of dollars and help you to become debt free in just a few years, or are they just another part of a broken systems looking to make money from people who are already in financial peril?
Before you decide to use one of these firms it is essential that you know what debt consolidation is. When one consolidates their debt the idea is that they put all of their debt into one central location in order to simplify their payments and to negotiate lower rates. Consolidating will take the away the stress of having to make multiple payments, and hearing from multiple debt collectors when you fail to make payments.
The key to this whole equation, and how you can tell if a debt consolidation firm is legitimate, is negotiating a better deal than you are currently getting. This might seem obvious, but the truth of the matter is that many people who enter into agreements with these companies end up paying even more money than they would in the first place. We will discuss that more when we talk about avoiding debt consolidation scams, but first let us talk about how a legitimate firm would operate.
How Debt Consolidation Firms Work
The job of these companies is to act as a negotiator between you and the people you owe money to. Some firms will buy up all of your current debt (at a lower negotiated price) or simply negotiate a lower rate and handle all payments for you. Either way you only need to make one payment every month, which goes directly to the firm.
Often times these negotiations could be done yourself, but the idea is that these companies know how to get the best deals possible and already have established relationships with the debt collectors. The firms make money either by getting paid a commission from the debt collectors themselves, or by charging you a certain percentage of the money they saved you. Paying this price can certainly be worth it, if they are able to get you a significantly better deal than you could yourself.
Separating the Good Debt Consolidation Firms From the Bad
This first sign that you are working with a good debt reduction firm is that they will take a detailed look at your current financial situation and give you specific details on how they can help you. If a company makes you promises without knowing the details of your financial situation, you can bet they are up to no good. A legitimate company will lay out all of your debt consolidation options and help you decide which is best for you, even if it means not using their services. Make sure you look into both secured debt consolidation and unsecured debt consolidation loans and find out whats best for you.
Transparency is the key to not getting ripped off. The company you go to needs to be able to give you a detailed report of exactly what they are doing to help you, and show you where they are saving you money. They should also send you a monthly report of the payments being made on your behalf. One of the biggest problems people face when working with a bad debt company is having them miss payments. Even if they are the ones handling the money, if they miss a payment it is just as bad as if you missed it yourself.
Never pay an upfront fee for debt reduction services. A legitimate company will only make a profit if they do their job, which is getting you the best deal possible. Companies that charge high fees to consumers are most likely getting paid by both you and the debt collectors. This is a sure sign of a greedy company who does not have your best interest in mind. Read the fine print and watch out for any of these extra hidden fees. Make sure to get a free debt consolidation quote, they exist and they will help you.
Look for people who have used their service in the past and have had good results. If a company does good work you can bet that there will people out there willing to sing their praises. It is also a smart move to look up any company in the Better Business Bureau.
Just because a company claims to be a not-for-profit organization does not necessarily make them legitimate. The FTC found at least two companies recently that used the NFP title to trick people into working with them, while funneling all of the money into a different, for profit, organization.
People with high levels of debt are living in an extremely high stress environment and can often be easy targets for scams. When working with one of the many debt consolidation firms out there you need to clear your head and look at them with a skeptical eye. If you are going to trust them with your financial future you need to make them prove to you that they are for real. Anyone using high pressure scare tactics is likely someone you want to avoid at all costs.
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