What Are the Pros and Cons of Debt Consolidation Programs?

By Jill Leviticus

  • Overview

    What Are the Pros and Cons of Debt Consolidation Programs?
    Debt consolidation companies can help you pay your bills when you are financially strapped and unable to meet all of your expenses. While there are benefits to consolidating your bills and reducing your monthly costs, there are also some negatives that should be considered before you sign up with a consolidation company.
  • Function

    Debt consolidation companies contact each of your creditors and negotiate with them to lower the fees and interest rates on your accounts. In some cases, your representative may be able to convince a creditor to accept a lesser amount than what you owe as payment in full. Debt consolidation covers unsecured debt, or debt that is unrelated to a property or product. Unsecured debt includes such things as credit card and medical bills. Your mortgage and car loans are considered secured debt and will not be included in the consolidation. Consolidation will allow you to make one payment to the consolidation company each month rather than paying each of your creditors individually. This payment will be used by the company to pay all of your unsecured accounts. Your new monthly payment will probably be lower than the combined amounts you paid before consolidating your debts.
  • Pros

    In addition to reducing your debt, consolidation will benefit you by lowering your stress level and eliminating worry about paying your bills. Your counselor may provide you with budgeting suggestions and money management techniques that will help you learn how to better manage your finances.
  • Cons

    Debt consolidation is not free. You will usually be asked to pay a fee to begin the process and may find that monthly handling fees are added to the amount you pay the consolidation company. It is important to speak to several companies and compare the set-up and handling fees for each. There may be penalties if you are unable to make a monthly payment and you will want to ask each company how it will handle late payments or non-payment. Before contacting a debt consolidation company, you may want to contact your creditors and try to negotiate a payment plan or a reduction in the total amount due. If you are successful, you may not need to use a consolidation company.
  • Considerations

    Debt consolidation will not automatically solve all of your problems. You must continue to make the agreed upon payments and make regular payments to your secured accounts to avoid further financial difficulties. Consolidation can negatively affect your credit rating, as your creditors may consider your account to be in collections even if they have agreed to the plan presented by the debt consolidation company. Choose a company that has had success in convincing creditors to issue positive credit reports as long as payments are made.
  • Warning

    Debt consolidation companies may operate as for-profit businesses or non-profit organizations. Non-profit organizations may offer lower fees, but you will need to make sure that the organization is truly a non-profit before signing anything. A non-profit organization should be able to show you its 501(c)(3) certificate if asked. Some debt consolidation companies don't make payments to creditors on time, which can damage your credit. Before working with a particular company, check that company's record with the Better Business Bureau. If there are multiple complaints, it may be wise to choose a different company.
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