Drawbacks of Debt Consolidation Companies

Debt consolidation brings your high-interest debt accounts together under one payment program. When you are searching for debt consolidation help, you may consider working with a company that specializes in debt consolidation. You should be familiar with the possible drawbacks of debt consolidation companies, however.

Payments

A common arrangements is to have the debt consolidation company set up a payment plan that requires you to send the company one monthly payment to cover all debts, according to financial journalist MP Dunleavey on the MSN Money website. A fee is built into that payment plan that can be as much as 10 percent of the monthly amount due. For example, if your debt payment is $500 a month, you would pay $550 with a 10 percent fee added. Another concern is that you must rely on the debt consolidation company to make the payments to creditors on time. Occasionally, that does not occur, and late or missed payments can have a negative effect on your credit rating. Consult the Better Business Bureau website to determine whether the consolidation company you are considering has a history of customer complaints regarding missed or late payments.

Counseling

Debt counselors help you analyze your monthly obligations and help you create a budget that will keep you out of financial trouble, according to Jenny McCune on the Bankrate website. While some debt counselors offer debt consolidation services, debt consolidation companies may not offer debt counseling. Without the help of a credit counselor, you risk creating more debt and needing another consolidation loan.

Costs

Debt consolidation companies can cost you more than the monthly administrative fee, according to the Federal Trade Commission website. Your consolidation loan may have a high interest rate that would force you to make payments that are higher than your individual account payments added together. If your credit is poor, you may be forced to buy interest points on the loan to get an attractive interest rate. Interest points are fees--usually based on a percentage of the loan amount--that are paid up front to lower the interest rate of the loan by a percentage point or more.

Self-Help

Debt consolidation companies provide a service many people can do themselves. Discuss your situation with a representative at your bank to determine whether you qualify for a personal loan to consolidate your debt. Your bank may offer debt consolidation services that can help. You also can contact your creditors yourself and negotiate lower pay-off amounts for your accounts. You may be able to negotiate installment plans with your creditors to pay off your debt over time.