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Financial Fitness

Written by Erik Neilson

March 8 2017

Trustworthy

Financial Fitness

Is Debt Consolidation a Scam?

Written by

Erik Neilson

Dealing with debt can be a frustrating experience. Whether it’s due to excessive credit card use, student loans or otherwise, accruing debt is easier than most people would like to admit. One of the most commonly recommended methods of dealing with debt is debt consolidation, but is it just a scam in disguise?

Let’s take a closer look at debt consolidation and how it might help or hinder your situation.  

What is Debt Consolidation?

At its very core, debt consolidation is the process of grouping a number of mutually exclusive debts into one catch-all figure. If you owe $1,000 each on three different credit cards, for example, your new consolidated debt would be a single balance of $3,000. Consolidation plans often boast reduced interest rates, too, which tends to make them even more attractive to those who are finding it difficult to make multiple monthly payments.

It sounds simple enough, and most debtors will admit that they’d prefer to make lower monthly payments if at all possible. Debt consolidation isn’t without its issues, however, and in some cases, it may be a scam.

The Problems with Debt Consolidation Companies

The tendency for private debt consolidation companies to take advantage of debtors is unfortunately very common. Debt consolidation can come in many forms, from standard loans to balance transfer offers, Home Equity loans, student loan consolidation and more. The major takeaway to remember is that many of the companies that refer to themselves as “debt consolidation providers” are actually in the business of debt management, which is an entirely different discipline.

So, what’s the difference? Debt consolidation is a real tactic that refers to getting a new loan that goes toward paying off all of your debts with a single monthly payment. On the other hand, debt management is the process of negotiating payment plans with creditors. Companies that offer this service are often labeled as “credit counselors,” and if they don’t take the right approach, your situation may end up worse than it was before you went to them for help.

The Bottom Line: Debt Consolidation In Itself is Not a Scam

At this point, you’ve probably figured out that it’s best to steer clear of debt management companies. They tend to charge high monthly service fees for doing very little work, take little accountability and often draw funds directly from your bank. Debt consolidation, however—lumping your current debts into a single payment—can actually make paying off debts easier and more achievable.

Banks and credit unions typically offer these services and are great starting points when looking for the right lender. Be sure to check with at least a few lenders to get the best interest rate possible, and don’t hesitate to compare services against one another. Finally, remember that debt consolidation is not about reducing your debts, but instead making it easier to pay them off in a timely manner.

Those debt consolidation companies that sound like the solution? Chances are they’re just debt management companies in disguise—don’t let them take you for a ride.

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