Nonprofit debt consolidation describes companies that combine multiple debts and replaces it with a single loan to pay off all existing debts as a single debt. The (usually) lower interest loan goes to paying creditors while the debtor’s only debt obligation is the loan taken to pay the creditors.
What are the benefits of debt consolidation?
Individuals that consolidate their debt gain the convenience of paying only one creditor a month and can enjoy a fixed and/or lower interest rate if they consolidate their debt with a home equity loan.
What are the drawbacks of debt consolidation?
Debt consolidation provides the illusion of debt reduction but without changes to spending habits and smart credit practices, the individual may make his or her situation far worse than before. Individuals that pay off debt using home equity also imperil their home through this process. Unscrupulous non-profit debt consolidation companies will offer confusing, complex or misleading high interest loans than may not be in the best interest of the debtor. Keep in mind that the bank will seize the property you use as collateral if you cannot pay for the loan.
Typical warning signs of predatory companies:
Be wary of companies that:
Actively solicit your business rather than having you approach them for assistance
Ask for personal information over telephone and the internet rather than in person and before signing a confidentiality agreement.
Claim to be nonprofit but have no proof of their 501c3 status
Charge exorbitant fees or are vague about their fees. Some companies defer the cost of their services into the monthly payment that supposedly goes to creditors, in essence overcharging clients while maintain the guise of a non-profit or low-cost company.
Promise to significantly reduce your debt or promise to free you from debt in a suspiciously small amount of time
Use language with religious connotation as this is usually a marketing gimmick to lull clients into trusting then
It Is in your best interest to consult the Better Business Bureau (bbb.org) or the National Foundation for Credit Counseling for leads on credible debt consolidators.
What are services that debt consolidators should provide?
Reputable and responsible companies offer credit counseling and education to prevent clients from repeating behaviors that sank them into debt in the first place. Some debt consolidators can negotiate with lenders, although the success of these endeavors is questionable at best. Responsible debt consolidators will make an effort to educate clients about the associating dangers of securing their debt against their property rather than promising a false sense of security and debt forgiveness.