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John E. Pytte Sept. 26, 2017

DebtDebt consolidation is a popular topic these days. As with most financial service agreements, it’s the small print that really matters. There’s good reason for consumers to be confused. Television and radio ads can be misleading, so it just makes sense to do a little research before making an important financial decision. First of all, many so called debt consolidation programs are really debt settlement or debt management programs.

It isn’t at all surprising that consumers seldom understand the true cost of debt consolidation because the less you understand, the more money these companies make!

The True Cost of Consolidating Debt

Financially strapped consumers can easily be led astray by debt consolidation companies and the misinformation they rely on to convince vulnerable prospects to sign on the dotted line. Most consumers never speak with someone that specializes in resolving debt issues.

The truth is that consumers are unaware of the interest charges and fees that apply to many debt consolidation programs. A range of charges and fees may apply, depending on whether the program is a debt consolidation, debt management or debt settlement program. Debt consolidation companies use a variety of strategies to relieve consumer debt, including peer-to-peer loans, bank consolidation loans, credit card balance transfers and home equity loans.

Debt Consolidation Fees and Charges

Debt consolidation consumers should be aware of the many fees and charges that are charged by debt consolidation companies. A partial list of potential fees is listed below.

  • Origination fees of one to five percent of the total loan value are often applied to new loans to cover administrative costs.

  • Closing fees are just another type of origination fee.

  • Annual fees are frequently applied to home equity loans, home equity lines of credit and balance transfers. Annual fees can be as high as $50 a year.

  • Balance transfer fees usually range from 3 to 5 percent of the total amount transferred.

  • Late fees can amount to more than $100 on balance transfer consolidation loans. The terms of a debt consolidation contract should always be thoroughly reviewed.

  • Early cancellation fees can range from a flat fee of up to $500 or 1% of the loan value on lines of credit.

That’s Not All

The terms of a debt consolidation loan agreement specify the amount of interest that the consumer must pay the lender. Interest charges vary greatly depending on the nature of the debt consolidation loan. The interest charges on a debt consolidation loan from a bank or other lender usually range from 7 to 30 percent. The amount of interest charges may also depend on the credit score of the consumer. A credit score above 700 usually yields the lowest interest rates.

Many credit card balance transfer agreements do not assess interest charges for the first 12 months. Similarly, credit card companies often advertise interest free balance transfers for one year or more. Unfortunately, the introductory period goes by quickly. Late payments may also invalidate the 0 percent interest feature. Interest charges range between 4 and 10 percent on home equity loans. Home equity loans are somewhat risky since the consumer can lose their home if financial conditions grow worse rather than better. The same principle applies to any loan that is secured by collateral.

Carefully Consider the Available Options

It’s important to understand the difference between debt consolidation, debt settlement and debt management. Debt settlement companies negotiate with creditors to reduce or eliminate consumer debt. Clients typically pay a debt management company or credit counseling agency a predictable monthly fee to administer an agreed upon debt management plan.

Consumers should thoroughly research the available options to reduce or eliminate debt before making a final decision. The relevant fees and charges vary greatly from program to program and lender to lender. Every consumer has a unique set of circumstances that deserve careful consideration. Making an informed choice could drastically reduce the cost of dealing with burdensome debt.

Georgia Debt Relief is here to help you deal with your debt issues and avoid the pitfalls of unwise decisions. Contact us if you think you need some help navigating the confusing world of debt and finance. We’re right here in Savannah GA to help our community find their way to true debt relief.