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What is the Real Cost of Debt Consolidation?



Often when you talk to a debt consolidation agency, they won't give you a full breakdown of their charges. Many agencies prefer to state their charges as a monthly payment rather than give you an interest rate percentage, thus artificially lowering the perceived cost to you.

When considering employing a debt consolidation agency, it's crucial to weigh the potential benefits against the cost of their services.

The Difference Between "Credit Consulting" vs "Debt Consolidation"

Debt Consolidation is the act of consolidating all your debt into one place, whereas Credit Consulting is an agency that offers a wide range of services, one of which is debt consolidation.

Beware, many credit consultants will ultimately try to push you towards debt consolidation. They'd much rather make thousands of dollars by consolidating your debt than charging you per hour for consulting fees.

What is the Real Cost of Debt Consolidation?

Most consolidation companies will take over the negotiation process with your creditors. The first thing to consider is how much they can negotiate with your creditors to reduce your total debt. 

Let's say you owe $50,000. A debt consolidation company may be able to negotiate as much as 20% to 70% off of that amount. That is to say that they may get your creditors to agree to take only $25,000 and consider your case settled.

You will then pay the remaining $25,000 to the debt consolidation company. Very often the company will charge a premium on the amount they saved for you. For example, if they saved you $25,000 they may bill you for $35,000. That means that you will have $10,000 in costs right off the bat.

However, it's important to keep in mind that the company has saved you $25,000. In reality, the $10,000 cost is not so much when compared in that way and is probably way better than you can negotiate yourself.

The most important cost to consider is the cost of carrying your debt, usually expressed as an annual percentage rate. Many debt consolidation companies will be hesitant to tell you this number, opting instead to disclose just the monthly payment.

In reality, most consolidation companies will charge somewhere between 14% and 19% - more than most credit cards. This is on top of any additional monthly fee and upfront fees they may charge for their services.

Is Debt Consolidation Worth the Cost?

The main benefit of employing a debt consolidation service is that they should be able to save you money by negotiating a reduction in your debt. But you must be sure that the savings will cover the cost of their charges. 

Creditors will usually be much more receptive to working with a debt consolidation company than with the person that owes them money. They understand that if you're working with a credit consultant, you are serious about clearing your debts with them, and if they don't negotiate they run the risk of not getting paid at all.

Before you sign an agreement with a debt consolidation company, make sure you calculate the payment terms for any plan you're considering. Make sure that amount charged is less than the money you will save by having them negotiate for you.

There are many online calculators where you can plug in your monthly payment and your initial principal and figure out what your APR and total interest costs actually are.

If your debt is relatively small, it may be better and cheaper to consider negotiating a plan with your creditors yourself. One of the most effective ways of going it alone is the "Debt Snowball Method". Many people have cleared all their debts with this system. Although this will take a bit of work on your part, many people have managed to become debt-free without any outside help.

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