Though most debt consolidation online service providers are genuine in their desire to help their clients with their debt problems, they all have to make money to continue in business. The two keys to profitability in the debt consolidation business are:
- Successfully assembling a portfolio of loans that will produce enough interest income to offset potential loan default losses;
- And keeping operating costs as low as possible.
Companies that specialize in debt consolidation online services have an obvious cost advantage over their “bricks and mortar” competitors – except in cases where the client has been able to maintain a high credit score. In those cases, the client’s bank or credit union may be in a position to provide better debt consolidation loan terms. A high credit score assures that the client’s default risk is very low, and if the client already has a borrowing, checking, or savings history with the bank or credit union, the cost of qualifying the client for an additional loan is minimal.
Borrowers with credit scores lower than the threshold for bank or credit union loans may need to seek debt consolidation assistance from a specialty debt consolidation company.
Risks and Advantages of Using Specialized Debt Consolidation Companies
Since specialized debt consolidation online companies don’t expect to serve clients with strong credit scores, they can start out with three basic assumptions about the clients that will seek their services:
- Prospective clients already know that they will have to pay higher interest rates than they would at a bank or credit union;
- The clients wouldn’t be there unless they had debt levels that were causing them significant pain;
- At least a portion of the clients will need a loan quickly, and a will be experiencing a degree of stress that impairs their ability to carefully evaluate the credit terms offered.
Those three assumptions make the specialized debt consolidation online business attractive to operators willing to cash in on the vulnerabilities of the clients they serve without much (or any) regard for actually helping the clients. Choosing a reputable debt consolidation company is important. Fortunately there are plenty to choose from.
The good debt consolidation firms take the time to fully understand the client’s financial circumstances and put together a debt consolidation package that is the best realistically possible. If a simple debt consolidation loan does not provide a practical solution, some specialized debt management companies offer contracts (sometimes called Debt Management Plans or DMP’s) that allow the company to collect a single affordable monthly payment from the client, and then negotiate with each of the client’s creditors for lower interest rates, extended payment terms, or even partial debt forgiveness. They use the offer of an assured portion of the single payment the client makes to the company as negotiating leverage.
Signing a contract for a Debt management Plan may be the only way short of petitioning for bankruptcy for a family to get out from under their debt burden. There are, however, a number of things to consider before signing a contract:
- There are a lot of expenses incurred by the company administering a Debt Management Plan, and those expenses get passed along to the client, along with a profit margin sufficient to cover the costs the firm must absorb when other clients default on their monthly payment commitment.
- Debt Management Plans may include debt consolidation loans which increase the total number of monthly payments required to pay down debt without significantly lowering the interest rate on the debt. The result is that the client ends up paying a great deal more interest than they would have without the DMP.
- Any Debt Management Plan that includes forgiveness of all or a portion of a debt will have a serious negative effect on the user’s credit score.
- Individuals considering paying a debt consolidation online service provider to negotiate lower interest rates or extended payment terms from their creditors can often do as well or better by contacting the credit card issuers themselves.
The Right Way to Use Debt Consolidation Online Service Providers:
If you think that the using debt consolidation online services is the best course for you and your family, here are some guidelines to follow:
- Get a current copy of your credit report (and your spouse’s if applicable);
- Make a complete list of all your debts;
- Make a complete list of your fixed and variable monthly expenses;
- Take the credit report(s), list of debts, and the lists of fixed and variable monthly expenses to a qualified non-profit debt counseling service to get an objective opinion as to whether using debt consolidation online services is really the best option for you and your family;
- Be a smart shopper. Look at fees published on each firm’s website, and beware of firms that promise to solve all of your credit problems at little or no cost to you. If claims seem too good to be true, they usually are;
- Check each firm’s track record with your community’s Better Business Bureau;
- When contact the company you select, have a clear idea of what services you want, and what those services are going to cost you.