I made some mistakes when I was younger, and I’ve landed myself in a bunch of debt. Should I work with a loan consolidator?
The main thing to keep in mind in terms of credit and loan consolidators is that they still have businesses to runs and profits to make. Unless you are being approached by a 501(c)(3)charity organization, loan consolidators will be making money off of your debt.
So how can they help themselves by helping me?
There are several ways they can make a profit while still helping you. One way is to negotiate down your debts. If you owe $5000, and they can negotiate it down to $2500, while charging you a total of $3000, then they have managed to benefit you by reducing your debt while at the same time making a profit for themselves.
Another more common way is through interest rates. Interest rates vary from company to company, especially when it comes to credit cards and payday/check cashing services, but the range that I’ve generally seen is between 18-24%. Loan consolidators can have much broader ranges. In order to know whether or not a certain company is good for your situation comes down to diligently reading the terms of the agreement.
For example, I recently had a client come to me who was considering going with a loan consolidator to take care of her credit card debt, her student loans, and a couple of accounts that she had in collections. When looking over her prospective loan documents, she had a lot of debt with a card that was charging her a 21.98% interest rate. You’d think anything would have been better than that, right? Wrong. The offer from the loan consolidator would have combined all of her various debts into one loan, while charging her a 30% interest rate. Including her other loans, her interest rate would have gone from an average of 13.53% to a flat 30%. There was no way that she would come out ahead in this deal.
But it’s not all bad. There are loan consolidators out there who charge more favorable rates of interest, so it will benefit you to get several quotes and read the fine print carefully.
So are you for or against loan consolidators?
At the end of the day, it’s a business. Loan consolidators, collection agencies, IRS agents, these are all people with jobs to do and families to feed. I don’t think they are any better or worse than the next guy, but the business they are in deals with people and situations that are already bad, which helps set them up to have a negative reputation if things get worse. Like all industries, there will be good, fair, honest loan consolidators, and then people of the fishier variety. If you are considering going with a loan consolidator, there are two things you need to do; you need to do your homework on who you are dealing with, and you need to have someone who is financially literate and knows your situation read through the documents with you to make sure what you’re getting will actually benefit you.