Making a Debt Consolidation Program Work for You

Most debt consolidation programs simply involve consolidating your debt into a single loan secured against your house or a home equity loan. This large loan is used to pay off your smaller high interest loans, leaving you with a single payment, which is hopefully lower than your previous combined monthly payments. Your home equity loan will usually have a lower interest rate and a longer term. Sounds great right? If everything were that simple, it would be a great option. Because securing a home equity loan is a bit more complicated, you will want to make sure that this option benefits you before you sign on the dotted line.

Debt Consolidation Program VS Credit Counseling

Another common program that people use to get out of debt is credit counseling. Credit counseling services usually suggest a debt management plan in the worst cases, but a good credit counseling service will only do so after thoroughly reviewing your debt and financial situation. Credit Counseling can be more attractive because you do not have to secure your home against a loan, putting your house at risk.

However, many credit counseling firms are not legitimate and do not have your best interest at heart. When you look for credit counseling services, you can find whether a service is government-approved online. You can also call your state Attorney General, local consumer protection agency, and the Better Business Bureau to see if any customer complaints have been filed against the company, if the company is required to be licensed in your state, and if so, whether it is.

Fees for Both Programs

Debt consolidation home loans usually comes with fees in the form of points, with one point equal to one percent of the amount you borrow; closing costs; title searches; document preparation and insurance; any appraisals; an application fee for processing the loan; and the interest on the new loan. Some of the fees may be waived depending on the debt consolidation

program offered by your lender, but you will always have to pay interest on your new loan.

Credit counseling firms are not always free, although most of them are nonprofit. Always read your contracts carefully with any group that you are involved with to find hidden fees. Because a credit counseling service might recommend a debt management plan, where you make payments to your credit counselor who then pays off creditors, you need to know about the fees they will take out of the payments you are making. Remember, you are responsible to your lenders, not your credit counselor, and if they do not make the minimum payments required by your lenders, you could damage your credit further.

Precautionary Steps

Debt consolidation services that ask you to sign papers that you don’t understand may intend to take your home rather than help your financial situation. Anyone who asks you to sign your house over to them so they can help you catch up with your payments has their eye on your property. Agreeing to that sort of arrangement is the same as giving your home to that person. Ask a lawyer or trusted financial advisor to look over all paperwork for a home equity loan before you sign it.

Credit counseling services can be a great help to you, if they are genuine in their efforts to improve your financial situation. Here are some clues to look for, if you suspect that they’re more interested in getting your money than helping you:

They pressure you to make “voluntary contributions”
They want you to start a DMP without reviewing your financial situation and looking for other alternatives
They want you to enroll in a DMP without teaching you about money management or budgeting
They ask you to start making payments into your DMP before your creditors have agreed to the program
They require personal information about you and your finances before they will send you free information about their services
They charge high up-front or monthly fees for either credit counseling or a DMP.

Feeling uncomfortable with a firm is a sure sign that you should review your contract thoroughly or move on. However, make sure that you are truly uncomfortable with their business practices or intentions for your finances rather than with the idea that the company will hold you to a budget or ask you to be responsible for your finances.

If you have a serious debt issues, a debt management plan from a reputable firm can help you get on your feet again and avoid similar situations in the future.

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