Learning how to choose a debt consolidation company does not need to be painful, but the process can be confusing. A debt settlement agency is not the same as a debt consolidation company or a lender that can offer debt consolidation loans. Understanding the difference can save you money and help you avoid a negative impact on your credit score.
Legitimate debt consolidation companies can show you how to apply for a debt consolidation loan, but they rarely act as the lender. Paying off credit cards and other high-interest debt is your primary objective. A debt consolidation company helps you choose the right way to do that. Below are suggestions for deciding which company is best qualified for you.
Step #1: Review the Website
You can learn a lot about a debt consolidation company from their website. Check the “about” section and review the website’s blog to see how often they post articles. Call the phone number if there is one or send an email to make sure there’s an active customer service department. You can also reach out via live chat, but that could be an AI bot responding.
Read the information on the website carefully. Does the company help you choose the best debt consolidation loans or are they a lender themselves? Are they focused on assisting you with consolidating your debt or are they a “debt settlement” agency? The answers should be on the website. Look closely. Some may be in small print. Others could be buried behind links.
Step #2: Inquire About Approval Requirements and Fees
Banks and credit unions are required to disclose their fees upfront. Their approval criteria are usually transparent. Some debt consolidation companies don’t operate that way. Look for written disclosures about fees and guidelines on what number credit score you’ll need to get approved for personal loans or a balance transfer credit card to consolidate your debt.
One of the cons of debt consolidation loans is their effect on your credit score. This is largely the fault of debt consolidation companies that shop your loan request around to various lenders. Companies that collect a fee as a loan originator or broker should be avoided. Non-profit credit counseling services that work in your best interest don’t have the same motivation.
Step #3: Ask About Debt Consolidation Options
The reason you go through debt consolidation is to lower the interest ate on all of your individual debts. Credit card balances are charged a variable interest rate that is roughly 10% higher than what you’ll pay on an outstanding loan amount. Personal loans also come with a fixed monthly payment and multi-year repayment terms. They’re the most common way to consolidate debt.
Other options for paying off credit card debt include using a balance transfer credit card or borrowing against the equity in your home. The transfer option requires finding a card with a low or 0% APR. Home equity loans or HELOCs would of course only work if you owned a house. Can the debt consolidation company you’re investigating help you with all these options?
Step #4: Compare the Offers with Your Local Bank
Some might think that checking with the bank should be your first step. We’ve listed it here because knowing what other companies offer can give you leverage when you go back to your local bank. If you’re going to commit to a loan to pay every month, you should feel confident that you’re getting the best terms and conditions possible. You’re “shopping” for a good deal.
Comparing offers from debt consolidation companies with the same loan amounts from banks or credit unions could also reveal if you’re being charged high fees to work through a third party. Many consumers use the online shopping process for debt consolidators to learn more about how debt consolidation works, then go back to their bank to apply for the actual loan.
Step #5: Ask About Credit Counseling Services
There are reasons you’re in the position you’re in. Some of them might have been out of your control, like a job loss or increased housing costs. Taking out a debt consolidation loan or home equity line of credit won’t solve those problems. You’ll need to get better at budgeting, find a new source of income, and stop using credit cards when you can afford to pay cash.
Credit counseling can help you with all these issues. Find a debt consolidation company that offers it. Non-profit services normally do. Banks and credit unions sometimes offer credit counseling workshops you can attend. Consolidating debt without examining the underlying causes of that debt is only putting a Band-Aid on the problem. You need more than that.
Step #6: Making Your Final Decision
At this point, you’ve reviewed the website, inquired about approval requirements and fees, asked about debt consolidation options, compared those options to what your bank has to offer, and checked into available credit counseling services. That’s a lot of data to wade through before making a final decision. Begin by getting it all organized.
There are several ways to do this. One of the simplest is to set up a scale to measure each of the points on this list. You’ve seen online product reviews on eCommerce sites. That system could work here too. Rate each category on a scale of one to five. If it’s a yes/no question, like credit counseling, rate a “no” as a “1” and rate the actual service as a 2, 3, 4, or 5.
The first step on this list takes care of verifying the legitimacy of the company. The rest break down the services those companies have to offer. After evaluating several companies, you have some tough decisions to make. Debt consolidation isn’t a stand-alone event. It’s a process. You’ll want to go through it with a company you’re comfortable with.
It’s also okay to hold off if you’re not fully comfortable with any of the consolidators you meet. Continue the search until you find the right debt consolidation partner or use what you have learned to apply for a loan or line of credit on your own. There are several free online resources that can help you with that. Do your homework. Take your time. Get it right. You’ll be debt-free in the end.
