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Are Debt Consolidation Companies Worth It?

Debt consolidation companies market themselves as an easy fix to get out of debt fast. But are they really worth it? The answer depends on your specific situation. This article will go over the pros and cons of using a debt consolidation company versus trying debt consolidation yourself.

What Is Debt Consolidation?

Debt consolidation simply means combining multiple debts into one new loan or balance transfer credit card, ideally with a lower interest rate. For example, you may take out a personal loan to pay off several credit cards. Or you could transfer credit card balances to a new card with a 0% intro APR.Either way, the goal is to simplify payments and pay off debt faster. Your monthly payment may go down since you have just one payment instead of many. And with a lower interest rate, more of your payment goes to pay down principal rather than interest.

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Debt Consolidation Company Options

There are a few main types of companies that offer debt consolidation services:

  • Credit counseling agencies – These nonprofits can help you with budgeting, money management tips, and setting up a debt management plan (DMP). With a DMP, the agency negotiates lower interest rates with creditors and you make one monthly payment to the agency.
  • Debt settlement companies – They negotiate with creditors to settle debts for less than you owe. You stop paying creditors and instead save up in a separate account until enough is accumulated to make settlement offers.
  • Balance transfer credit card companies – Banks and credit card companies offer balance transfer cards with 0% intro APRs for a set period of time, usually 12-21 months. You transfer balances from high-interest cards to save on interest while paying down debt.
  • Personal loan companies – Online lenders like LendingClub, Prosper, and Lightstream offer personal loans at fixed rates, which you can use to consolidate debt. Rates are based on creditworthiness.

Pros of Using a Debt Consolidation Company

  • May get better rates or terms – Companies often have relationships with creditors and lenders that let them negotiate better deals on your behalf.
  • Convenience factor – They handle contacting creditors, consolidating balances, paperwork, payments, etc. Less work for you.
  • Accountability – The set monthly payment plan may help you stick to a payoff schedule vs trying to manage payments yourself.
  • Credit counseling guidance – Nonprofit credit counseling agencies provide budget help and tips for improving credit and getting out of debt.

Cons of Using a Debt Consolidation Company

  • Fees – Most charge fees for their services, either a monthly fee, percentage of debt owed, or flat upfront fee. This is money that doesn’t go toward paying off your debt.
  • Risks – Debt settlement can leave you vulnerable to collections or lawsuits while you save up. Balance transfers still require discipline not to run balances back up.
  • Credit damage – Debt settlement always damages credit scores. Balance transfers or loans can too if you miss payments.
  • Scams – Some companies overpromise with claims of easy debt relief but underdeliver or defraud customers. Stick to reputable providers.

Pros of DIY Debt Consolidation

Doing it yourself allows you to:

  • Avoid fees – You keep the savings instead of paying fees.
  • Pick your own lenders – Shop around for the best loan rates and terms based on your credit.
  • Maintain control – You manage the process rather than relying on a company.
  • Build credit – Responsible use of loans/cards to consolidate debt can improve your credit over time.

Cons of DIY Debt Consolidation

  • Time-consuming – Contacting creditors, researching loans, completing applications takes effort.
  • Unfamiliar process – If you’ve never done it before, the process can seem daunting.
  • Accountability – No one but yourself making sure you stick to payment plans. Requires discipline.
  • Limited negotiating power – Lenders may not give you special treatment vs working with a company.

Questions to Ask Yourself

Here are some key things to consider when deciding if a debt consolidation company is right for you:

  • What is your credit score? The better your credit, the more likely you’ll qualify for a low-interest debt consolidation loan on your own.
  • How much debt do you have? If it’s a smaller amount you can pay off quickly, a DIY approach may work fine. For large amounts, a company may provide more help.
  • Do you need credit counseling? If you struggle with budgeting and money management, a nonprofit credit counseling agency can provide guidance.
  • Are you a disciplined self-starter? DIY consolidation requires you to stay organized and follow through. If not, a company may keep you accountable.
  • How is your credit utilization? If you’re maxed out on cards, a balance transfer may help lower utilization, boosting credit scores.
  • Can you afford consolidation fees? Factor in fees when calculating if a debt relief company offer will actually save you money.

The Bottom Line

Debt consolidation companies can sometimes help negotiate better rates and terms that save you time and money compared to DIY options. But make sure to vet providers thoroughly, understand fees, and watch out for scams or services that damage credit.For many people, the DIY debt consolidation route works perfectly fine and allows you to avoid fees and maintain control. It comes down to your financial situation, how much effort you’re able to put in, and whether you need the help of a company to realistically stay on track paying off your debt.

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