Many people think that debt consolidation firms do not make any money and they are there just to help you out. But the fact is that although most of the debt consolidation companies claim to be non-profit, they do make a lot of money at the cost of their customer’s financial health.
The customers can be charged in many ways by these companies. Some companies deduct a percentage of the payments made to the lenders, whereas others keep the first one or two payments to cover for "administration costs". But this can really affect the customer’s credit report as it can lead to the customer being considered delinquent from the creditors’ point of view.
Example #1
Here is an example of debt consolidation. Imagine that you’re facing a credit-card debt of $20,000. Attracted by its nonprofit status, you turn to a debt consolidation company. You are surely welcomed by the company and are showered with tokens of gratitude.
But your real surprise comes when they pocket your entire first payment as a "voluntary contribution." You will also be astonished to learn that the company is collecting nearly 10% of your payments as "continuing contributions". This is disclosed in the fine print of the contract, which most of the people don’t bother to read all, but you figured you could trust a "non-profit" company.
The representative urges you to sign quickly, portraying the good effects it will have on your financial condition and never discloses the fees. How can someone who wants to go for debt consolidation afford to pay another fee? Thus the fee puts you behind with your creditors, triggering late fees. By now you understand the whole game and the truth: such firms are not doing credit counseling, they’re just passing through your money and taking some off the top for themselves, which doesn’t sound like a non-profit company at all.
Example #2
This is another example and involves debt settlement. Imagine that you are stuck with $20,000 of debt, in unsecured credit card. You owe:
- Credit card company A $10,000
- $7,000 to company B
- $3,000 to company C
You decide to sign a contract for a five-year debt settlement plan where you pay $250 a month to the settlement company.
This may sound great as $250 a month for five years is only $15,000, so you will be saving $5,000 and the good thing will be that you’ll be debt-free in just five years, right?
But if you observe this arrangement a bit closer, you’ll see that its just not that great. There is an administration fee that will cost you $750 up front. To cover that, your first three monthly payments will go towards that admin fee and nothing gets put into your trust account until your fourth monthly payment has been paid. Thus you are losing $750 for nothing. Then the settlement company takes the first $50 of your $250 payment every month as the service fee, which means that only $200 a month is actually being added to your trust account.
As most of the debt settlement companies claim to be able to settle your debt for about 1/2 of what you actually owe, let’s use the company B debt as an example:
If you owe company B $7,000 and the creditor agrees to accept $3,500 as payment in full, it will take you 8 months at $200 per month to have accrued enough cash in your trust account to pay off just that one credit card bill.
But if you remember, your first three payments to the debt settlement company are going to pay the $750 admin fee. This means that your first credit card debt isn’t really settled until 11 months after you started sending them money! Thus your creditor won’t agree to accept half of your actual debt amount in settlement unless, that amount can be paid in full. Or else, they’ll expect you to make your normal monthly payments.
Conclusion
Debt consolidation companies, even if they claim to be non-profit, are in the market to make money. You may think that you’ve done something about the debt problem, but the truth is that debt consolidation is nothing more than just a "con". The debt is still there, and so are the causes that led to it. You cant get away from debt by taking on more, the wiser way is to control your spending and pay off your debt, starting off from the minimum and clear your way out.
