Free Debt Consolidation (Credit Consolidation)

While searching through your debt consolidation options to find the best course of action, cost almost certainly is a factor. “Free” sounds pretty good, but is it too good to be true? Is there really such a thing as free debt consolidation?

In a word “no”, but the answer really depends upon your definition of “debt consolidation”. Many people use the term to describe the practices of so-called debt consolidation companies. Such companies utilize negotiation with one’s creditors to lower your debt load to a reasonable, payable amount. Unfortunately, such services are not free.

Debt Consolidation Companies

The cost of working with a debt consolidation company can vary dramatically among companies. Generally, you can expect to pay at least two different fees: an initial fee upon your enrollment in the program, and a monthly maintenance fee that usually is determined as a percentage of your total debt load.

All costs should be provided to you upon your first meeting. Before you decide to work with a particular company, make sure that you compare costs at several different companies. You will not know if costs are reasonable unless you have looked at more than one business.

Therein contains one free service of debt consolidation companies: your initial consultation should be free of charge. Use this to your advantage, and take a very close look at companies who charge a fee for this service. Really, you should check all companies with the Better Business Bureau in any case.

You might think that certain types of debt consolidation companies, such as non-profit or Christian companies are more affordable that strictly for-profit companies, but this is not necessarily true. In fact, you likely may find no difference in costs among companies with such labels.

Worse case scenario, some companies have been known to label themselves as “non-profit” or “Christian” just to draw in business from people who have not done their homework at the BBB and elsewhere. It goes without saying that companies who utilize such tactics probably do not have your best interest at heart.

Costs of other Debt Consolidation Options

The term “debt consolidation” often is expanded to describe other debt relief options as well, such as credit counseling and debt consolidation loans.

Credit counseling combines advice and financial education along with immediate problem-solving. A counselor normally does not negotiate actual debts, but usually will help his or her client come up with a repayment plan.

Similar to debt consolidation companies, working with a credit counselor may cost you an initial start-up fee as well as monthly fees thereafter. However, credit counseling does tend to be more affordable because many organizations are legitimately non-profit, and some actually may be free. Counselors certified by the National Foundation for Credit Counseling, for example, are non-profit.

Whether or not individual programs are affordable for you, however, is something that you must determine on a case-by-case basis, and through comparison shopping. Make sure to check all credit counseling organizations with the Better Business Bureau as well.

Keep in mind that while fees to work with a credit counselor may be less than with a debt consolidation company, credit counselors generally do not lessen your debt load like consolidators attempt to do.

Other people decide to obtain a debt consolidation loan to help straighten out their financial situations. Such a loan combines multiple loans into one, so the bill paying process is simplified and people can keep better track of payments. They also sometimes allow individuals to obtain lower interest rates.

Debt consolidation loans can be obtained from various financial institutions including banks and credit unions. Many loans do not require application fees, and if an institution does charge one, then you should ask if it can be waived. Beyond this, annual fees and late fees may be charged. All costs should be presented to you in writing before you apply.

In rare cases, you may be able to obtain an unsecured debt consolidation loan, like a personal loan, if you have excellent credit. However, most people get secured loans that require property to be put up as collateral, such as home equity loans. In such circumstances, you must consider the other “costs” of your debt consolidation besides money. How will taking the equity out of your home affect your financial future?

What other “Costs” should I consider?

Costs do not always mean money. Consider the “cost” of affects to your credit score with your different debt consolidation options. For example, working with a debt consolidation company hurts your score before it ultimately improves. This is because the program relies on your ceasing payments to your creditors so that instead you can save your money in a special account until it is time for repayment. Creditors who see your score dropping could decide to take legal action against you.

Consider also how thinly your resources are spread before choosing a debt relief option. If your debt is such that you realistically will not be able to make sufficient payments, then choosing credit counseling or a debt consolidation loan could cost you the ability to live at an adequate standard of living. If you cannot afford to pay, then you cannot afford to put yourself in a position where you must hand over cash.

The bottom line is that there are “costs” associated with every debt relief alternative – even bankruptcy. While it certainly is important to consider monetary costs and fees of the debt consolidation options that you are considering, it also is important to consider the big picture of your financial situation so that you find your best course of action.