The Truth About Debt Consolidation Loans

You've probably seen those online or TV ads offering to make you debt-free through a debt consolidation loan. The ads run something like this:

Eliminate Your Debt Today!

Get Out of Debt with Our Debt Consolidation Loans

Reduce Your Loan Payments Today by 50%!

And so on. Debt consolidation loans have been growing increasingly popular as more and more people wallow in credit card debt, auto loan debt, personal loan debt, etc. Many people feel that, by obtaining a debt consolidation loan, their slate is wiped clean, and they can start fresh.

For the most part, debt consolidation does work for many people. The process is pretty simple: first, you fill out a 1 or 2 page survey (either paper or online) about your financial status and current debts. The company sends this survey out to its network of banks. Then, you obtain a reply letter or e-mail which contains various offers from the banks. You pick the offer that is best suited to your needs (typically the one with the lowest interest rate).

Keep in mind that this entire application process should never incur an application fee; if it does, you might be dealing with a scam agency.

While the initial application process is more or less the same between most debt consolidation companies, there are some key differences too:

Credit amount. Companies will differ in how much credit they provide to you. Therefore, loan sums will differ from company to company.

Finance charge. As with most loans, different finance charges will be applied to your loan. In essence, the finance charge is the interest charge that you will pay for the life of your loan.

Number of payments. Some loan companies will want you to pay off your loan sooner rather than later, while other companies will stretch out your loan repayment time. This will be reflected in the number of payments you will make until your loan is completely paid off.

Unfortunately, as with all businesses, there are many scams out there too. Here are some things to look out for when attempting to secure a debt consolidation loan, as they indicate a possible scam:

Application fees. There should be NO application fee for finding out which kind of loan you qualify for. This is just the same as if you personally walked into a bank and asked for a loan: you would never expect the bank teller to ask you to pay money for basic information.

Loan fees. Loan fees will differ based on each individual consolidation agency, but they should never become excessive. However, some scam consolidators will charge upwards of 15% for the "service" of taking your monthly debt payment and transferring it over to your creditors. So, if you are paying $500/month to your debt consolidation loan agency, you might actually be paying only $434 on your loan, and the other $66 to the company itself. At that rate, you are better served by just calculating your own debts and paying your creditors directly. In fact, it's not even that hard, thanks to online debt calculators such as the MSN Money Debt Consolidator.

No or little customer service. Before you lock into your loan terms, try calling the customer service phone number that is listed for the loan agency. Speak with a live person and verify your loan terms before proceeding further. This will give you an idea if a) the customer service department even exists, and b), if the department is aware of its customers and what they are doing. Many scam sites are operated by one or two individuals overseas and thus have no or imaginary customer service departments.

At this point, you may be asking yourself why the FCC does not routinely hunt and shut down such scam sites. The truth is, both the FCC and the State Attorney General do in fact look for such sites and force them out of business. However, it is easy for such scammers to just open up another web site dealing out the same bad advice and shady loans. With such a lucrative payoff for obtaining even one customer per web site set up, scammers can open many web sites a day and target the inexperienced. As with any business dealings, it is always Buyer Beware.