The True Cost of Credit Consulting – Is It Worth It?
What does credit consulting really cost? Believe it or not, when you talk to a credit consulting agency, they often won’t give you many of the most important numbers. They might phrase their charge as a monthly amount rather than an interest rate number, artificially lowering the perceived cost.
When considering a credit consulting agency, it’s crucial to weigh the potential benefits against the potential costs.
==> A Quick Note on Credit “Consulting” versus “Debt Consolidation”
Debt consolidation is the act of consolidating all your debt into one place. Credit consulting is a wide range of services, one of which is debt consolidation.
Make no mistake, however; many credit consultants will ultimately try to push you towards debt consolidation. They’d much rather make thousands of dollars by consolidating your debt than charging you $50 an hour for consulting fees.
==> What’s the Cost of Credit Consulting?
The first thing to consider is how much they can negotiate off of your total debt. Most credit consulting companies will take over the negotiation process with your creditors.
Let’s say you owe $50,000. A debt consolidation company may be able to negotiate as much as 20% to 70% off of that amount. For example, they may get your creditors to agree to take only $25,000 and consider your case settled.
The remaining $25,000 is then paid to the debt consolidation company. However, they will often charge a premium on the amount they saved for you. Instead of paying your debt consolidation company just $25,000, they may ask for $35,000.
That’s $10,000 in cost right off the bat. However, it’s important to keep in mind that they saved you $25,000. In reality, the $10,000 cost is cheap when looked at in that light.
The cost of the negotiations, usually denominated as a percentage of the amount saved, is just one factor to look at.
Perhaps the most important cost to consider is the cost of carrying your debt, expressed as an annual percentage rate. Many debt consolidation companies will be very hesitant to give away this number, opting instead to disclose just the monthly payment.
In reality, most consolidation companies will charge somewhere between 14% and 19% – more than most credit cards.
This is on top of any additional monthly fee and upfront fees they may charge for their services.
==> Is It Worth the Cost?
The real question is whether or not they can save you money in negotiations and whether or not that will cover the cost of working with them in the long run.
Lenders will often be much more receptive to working with a debt consolidation company than with someone who owes them money. They understand that if you’re working with a credit consultant, chances are they’re not going to get their money if they don’t negotiate.
There are many online calculators where you can plug in your monthly payment and your initial principal and figure out what your APR and total interest costs actually are.
Make sure you calculate the payment terms for any plan you’re considering. Make sure that amount is less than how much money you’re saving by having a credit consultant negotiate for you.