Dear Reader,
Over the years as I’ve gotten older I’ve learned two things. One, in the Wonderful World of Republicans and Democrats, things usually aren’t as they appear. And two, because of lesson number one, you need to continually ask why, over and over again. If you do, you’ll eventually come close to the truth.
What does this have to do with debt consolidation companies?
First, let’s define what we mean by “debt consolidation company.”
When I hear the word “consolidate” I think of a company that takes all my debts, adds them up, and loans me the money to pay them all off. Then I just make one small payment to the consolidation company. They “consolidate” a bunch of small debts into one big, easy to manage debt.
These types of companies are few and far between.
Most of todays “debt consolidation companies” do nothing more than negotiate, on your behalf, with the banks. They get the banks to settle for a lesser amount at a lower rate of interest. Then, when you add up all your debts and all your payments, its an amount you can afford. And, to make sure things go according to plan, you make your payments to the consolidation company and they in turn pay the banks. The whole purpose is to get your debts paid off in 2 to 5 years.
Sounds like a deal, doesn’t it?
This is where things start to get confusing.
If you’ve ever read you credit card agreement it probably has a “default” or “universal default” clause.
With the “default” clause, if you’re late with a few payments over a certain period of time, with your credit card bank, they’ll raise your interest rate to a staggering 25 – 40%. With the “universal default” clause, if you miss any type to payment, to anyone, (that includes utilities, rent, or bouncing a check) during a certain period of time, they’ll raise your interest rate to the same staggering 25 – 40%.
Which brings us to several “why” questions.
You’re late on a few payments. The bank raises your interest rate to penalize you. Now, you can’t afford to make even the minimum payments. So, you go and pay some of your hard earned money to a consolidation/negotiation company to convince the bank to lower your interest rate and the balance due. According to these companies ads, the banks almost always agree.
Why? And why?
If the banks are raising your rates to penalize you, why would they agree to lower the rates for a third party consolidation/negotiation company?
And, why won’t they do this for you directly? Better yet, when you miss a few payments why doesn’t the bank send you a letter telling you not to worry, they’re going to lower your rates, forgive some of the debt, and reduce your payments until you get out of your financial pickle?
Could it be that there is something else the bank is trying to do when you get into a financial squeeze?
Are the banks raising the rates to force you into needing the services of one of these consolidation/negotiation companies? And, if so, what are they trying to get you to do?
Here’s where I really start to wonder.
The ads for these consolidation/negotiation companies brag that they can get your debt reduced up to 70%. Which means you will still owe 30¢ on the dollar. According to a recent article in the Boston Globe, collection companies are buying delinquent accounts for as little as 2.5¢ on the dollar. If these consolidation/negotiation companies are so good at what they do, why can’t they at least get the same deal? In fact, since they’re being paid to represent you, why can’t they get a better deal? Like $0.00?
Jim Bullock