Choosing to engage a debt consolidation or settlement service is a big decision. On one hand, it could be a great way to get you clear of debt, but on the other, there’s also the risk that you’ll end up paying fees that aren’t worthwhile.
The trick is that you need to know how to analyze the fees of these services in order to find a service that not only provides a favorable fee structure, but is also worth the money you’re paying.
“What Are You Paying For?”
First, you need to be well aware of exactly what you’re paying for. In general, debt consolidation or settlement services provide a combination of the following:
· Debt consolidation loans that consolidate all (or some) of your debt into a single loan with a minimum payment that you need to meet
· A debt settlement negotiation where they approach your creditors and negotiate on your behalf to lower the amount of debt that you’re in for
· Financial consultancy and planning to help you structure your income and expenditure so that you’re able to get out of debt
Some services provide additional extras such as helpful software and apps that can assist you with your financial planning, one-on-one consultation and so on – but the core idea is the same really.
Types of Fees
Nowadays there are three types of fees that you’ll normally come across when you’re looking at these services:
· Upfront ‘consultation’ fees are less common nowadays because of new regulations, but still take place in some cases. Legally, firms cannot charge you for debt settlement until they’ve successfully negotiated with a creditor – but some may charge you for the consultation and financial planning in the lead up to a loan.
· Monthly fees are more common and tend to be based on a percentage of the debt that is being settled. In some cases, if a debt consolidation loan is involved, it may include interest payments and if not, it may just be a service fee.
· Performance-based fees are incurred upon the successful negotiation of a debt settlement and are normally a percentage of the reduction. It is not common to find this type of fee, but it is definitely worth looking out for.
Different services will structure their fees differently, which is why it is important that you figure out the type of fees they’re charging and what you’re actually getting for those fees.
In the long run, if the service does what it promises, you will end up saving money. Even if they charge 20% of the total debt as their fee but manages to reduce it by 50%, that means that you still end up saving 30%.
Ideally, you should try to find as favorable a fee as possible, with a debt consolidation or settlement service that has a reputation for being able to negotiate with creditors. Look them up before deciding whether or not to consolidate loans with them and only make a firm decision once you’re certain that you will end up saving money.