What do debt consolidation companies do? It’s possible that different things are meant when referring to consolidation, so let’s discuss how this is approached by various companies.
Consumer Loan Companies: The idea of rolling all of your smaller debts into one consolidated balance is not a new concept, but the way this is accomplished has changed over time. When credit policies were less strict, it was common for people to obtain a personal loan to pay off their smaller credit balances. These were given in exchange for a personal guarantee, and there was no collateral beyond the signature and good standing of the person’s reputation and credit rating. Today, these types of consolidation loans are very difficult to qualify for without collateral. Instead, banks are making consolidation loans available by collateralizing them with the following form of guarantees:
Home Equity Loan: The most common form of debt consolidation company around today is a mortgage lender. Particularly easy to obtain in markets with rising home values, home equity loans essentially lend money against the value of your home in contrast to your underlying mortgage. Also termed a 2nd mortgage, you can use these funds to pay off small credit amounts and instead have one monthly payment. Is this a good idea? It can be, however, for consumers in debt it can also prove very troublesome for these reasons.
- Getting a Large Blank Check: Consumers who qualify are handed a large, lump sum amount of money. It can be very tempting to use these funds for things other than debt consolidation. The company issuing the home equity loan will not require that you use it for paying off your debts. It’s very common for consumers to use these funds to purchase things outside of reducing their debts. Now they have tapped their home’s equity, and still have other loan payments to make in addition to their new 2nd mortgage payment.
- Interest Only and Prolonged Terms: Lower monthly payments are the primary benefit sought by most borrowers seeking out a debt consolidation company. Keep in mind, the company itself is seeking profit. The lower your payment, the longer it will take to satisfy the loan. This results in much more interest that gets repaid over the next 10 to 15 years. In addition, borrowers may be unaware their lowest monthly payment option may be an interest only payment. To make payments on interest alone will mean your principal balance is never reduced. This can result in several undesirable scenarios in the not so distant future.
Non-Profit Debt Consolidation Companies
Another option for debt relief is something called consumer credit counseling. While not consolidation per se, it functions similarly but is not a loan. People who qualify for debt counseling are often given one monthly payment, sometimes at a reduced rate, that is made to a 3rd party organization. This group is typically a non-profit, and seeks to re-distribute your funds to your creditors. A common problem is that these debt consolidation companies are not always timely on making your payments. If this is a concern, you may want to conduct thorough research before choosing the best company. While we don’t offer traditional debt consolidation programs as listed above, we can offer you input on options you may find more appealing to debt counseling.
Ready to get on the road to being debt free? Contact us today for a free evaluation.