Ever wondered how all those debt consolidation companies make any money? While they all claim to find ways of cutting your monthly debt repayments into ‘more manageable’ sums – something anyone struggling with repayments is always going to find attractive – they end up being actually more expensive.
By dealing with these companies your debt doesn’t simply vanish – instead it becomes repackaged into a longer-term arrangement that can add thousands to the amount you owe. Anyone who is up to their neck in debt may find these options enticing, but the truth is that while they can provide a sense of debt relief, they are always going to increase the amount actually owed.
How Debt Consolidation Works
Many debt consolidation companies will market their services in a manner that encourages people to believe that it only takes one phone call to remove the stress of making those repayments simply go away. Once you have provided them with the authority to negotiate with your creditors – and that can include any unsecured debts such as credit/store cards, bank overdrafts, personal/payday loans, and so forth – they will combine it all together into one lump debt.
They will not look to negotiate much in the way of reduction of the amount you owe with the creditors – and even if they do so, do not expect that to be passed down to your new agreement with them.
The new arrangement will look attractive. Repayments will (or should) be reasonably affordable. The problem is that the total time it would take to pay off all of your previous debts – including accrued interest – will be far longer. Over the term of your restructured agreement, the amount you need to repay in total will be considerably more.
Nothing is written off by the majority of debt consolidation companies, but that psychological edge they can offer – basically amounting to what feels like more money in your pocket each month – is a double-edged sword.
Never assume that debt consolidation is anything like debt elimination or reduction.
Debt Consolidation Advantages
So why do so many people use these services to get their finances back on track? Technically speaking, the services being offered are not mis selling their services. Even though their marketing heavily implies that they can reduce the debt and make it much easier to service, they very rarely ever pass that through to the customer.
What ‘refinancing’ can provide is a way for people to proactively pay down their debt without needing to necessarily jeopardize their credit rating. It’ll cost more in the long run – and whether that saving is ‘worth it’ when someone has already demonstrated they are not that great handling their credit is a different question altogether.
For some people ardently opposed to other approaches, then debt consolidation may be a possible solution. Just be aware that you’ll always be out of pocket over the longer term.
Alternatives To Debt Consolidation
Independent financial/debt advice charities should always be your first port of call if you are swamped with unmanageable debt and repayments. Act as soon as possible to avoid your debts becoming worse! These will negotiate with your various creditors and provide them with a formal notification that you are struggling to manage or repay what you owe.
In many cases, creditors will then offer reduced debt levels and/or lower interest on repayments. These are passed directly on to the debtor and not soaked up into the profit margins of debt consolidation companies!
Money advice charities basically serve as a proactive and positive alternative to debt consolidation companies by going the legwork for people who are struggling. Rather than refinancing the debt, they will find a realistic solution for absolutely no charge whatsoever.
Remember that your credit rating may well be affected by having to restructure your debts in this manner, but that for many people they are the best long-term solution towards paying much less without needing to extend the term of the debt.
