Why I Chose Not To Use Debt Consolidation

by Khaleef "Fat Guy" Crumbley on September 19, 2011

in Debt Repayment

Debt Consolidation

About 12 years ago I considered debt consolidation. I honestly can’t remember the name of the company or the total amount of money that I owed. But what I do remember is that I was having an extremely difficult time trying to pay off debt, and I needed help!

Debt Consolidation To The Rescue?

Due to a few bad decisions, a string of misfortune, and a huge oversight (I tried to save money on car insurance the wrong way), I was deep in debt. At that time I was working both a full time job and a part time one (playing at my church). Unfortunately, I still wasn’t able to bring in enough income to pay all of my bills on time.

I remember searching for companies that offered debt consolidation services. I found one that offered to review your debt, help you to come up with a plan based on proposed lower interest rates and other assistance, and then contact your creditors and try to negotiate those lower rates.

In my case, they also planned to ask my creditors to stop charging interest for a certain amount of time (probably a year, but I don’t remember) and then to charge a relatively low rate for the current balance. If I was foolish enough to charge anything new, it would be charged the higher rate!

I could live with this arrangement. I figured that since they have experience negotiating with these creditors, they have probably developed strong relationships with them and are probably very successful in obtaining the proposed concessions.

Debt Consolidation: Not What It Seemed To Be

We had figured out a plan to get me debt free within four years! They were even nice enough to set up all the payments. The great thing about all of this? They never asked me for a fee! All I had to do was send them one payment each month, and they would send in my agreed-upon monthly payment to each creditor via a money transfer. Great deal – I even get to save money on stamps!!!

However, when I added up all the payments over the four year period, they ended up being a few thousand dollars more than the total of all of my debt (including the lowered interest amounts)! They didn’t ask for a fee up front because they baked the fee into each monthly payment!!!

What I realized was that they were charging me a few thousand dollars to do what I could do myself! So I gave them a call and asked them about the additional money baked into each payment. At first, they actually tried to convince me that I simply miscounted. But once they saw that I had passed 3rd grade math, and I owned a calculator, they confessed to the hidden fees.

So I cancelled the plan and called each creditor on my own to set up a payment plan. A couple of them refused to change my interest rate, but others made adjustments to help me get through a rough time.

Now…let me make this clear: I have no problem with someone offering a service such as this and charging a fee for it (it’s similar to when I provide financial consulting or even tax preparation for a client). What I have a problem with, is someone charging for a service, but hiding the fact that they are charging, and being completely dishonest about the entire process! That is key financial knowledge that needs to be disclosed upfront, so customers can make informed decisions.

Debt consolidation is a lot like getting a reverse mortgage, there are a lot of options – some are good, while others are nothing more than a rip off!

Of course, not all debt consolidation companies/consultants are like this, but this was my experience, and the reason why I didn’t go through with it.

photo by Alan Cleaver

Reader Questions

  1. Have you ever went through a debt consolidation service?
  2. Have you ever taken out a loan for the purpose of debt consolidation?
  3. Do you believe that it is sometimes wise to pay for a service such as this?

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Miss T @ Prairie Eco-Thrifter September 20, 2011 at 9:00 am

I consolidated debt a few years ago because I had gotten myself into a rough patch. It ended up saving me money and I was able to pay it off really quick. I think it all depends on what kind of plan they can offer you. I was able to get an interest free plan which was awesome. I have since avoided getting into debt so that I don’t have to go through this again.

novel investor September 20, 2011 at 11:53 am

Unfortunately many of the consolidation companies don’t explain whats really happening. And it can potentially hurt your credit more, than if you did the work yourself.

Amanda L Grossman September 21, 2011 at 7:35 am

The only debt consolidation I have done was with my student loans through Sallie Mae. Best decision! I kept out the higher interest debt ($6,000 at a staggering 9%, which I paid off very early). Then I consolidated the rest and locked in a 2.65% interest rate!

It’s all paid off now. In the meantime, it cut my interest payment drastically.

101 Centavos September 24, 2011 at 4:57 am

Debt consolidation is one area that seems ripe for abuse. After all, some (not all) people who find themselves deep in debt may not be the smartest or most financially savvy….

Jesse @ BP September 24, 2011 at 7:30 pm

My brother fell for debt consolidation and tried to convince my mom to use the same service. He had no idea what percent of his payments were actually going toward debt or any of the other details of the system. All he knew was he only had one monthly payment..

These companies prey on those in trouble looking for an easy way out.

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