Youve heard the ads on radio and television, especially during this recessionthe offers of debt consolidation for people who have built up too much debt and who have a bad credit rating or who even face bankruptcy. Perhaps you have thought about debt consolidation as a way to reduce your debt and start saving again, or even to forestall foreclosure or bankruptcy.

But there are so many programs and so many offers! The number of scam artists is growing, and consumers need to know which program is right for them and how to avoid getting ripped off. One of the first things you need to know is the difference between a debt consolidation loan and a debt consolidation service.

Debt Consolidation Loan

Basically, a debt consolidation loan is any low-interest loan that you receive for the express purpose of paying off two or more high-interest debts. For example, if you have three credit cards with annual percentage rates (APRs) of 15%, 20%, and 21%, and outstanding balances of ,000, ,500, and ,000 respectively, your debt is costing you a lot of money.

How do you figure it out? There are lots of websites that give you the figures on how much interest you pay on a given APR for every ,000 in debt. Given the above scenario, here is your breakdown:

15% APR-you pay .50 per month per ,000 of debt
20% APR-you pay .67 per month per ,000 of debt
21% APR-you pay .50 per month per ,000 of debt

Your three credit cards are costing you a total of 2.50 per month in interest charges alone. If you took out a debt consolidation loan (a home equity loan or a personal loan) for the total amount of ,500 and your rate was 7% APR, you could pay off your credit cards. Your new ,500 debt would cost you .83 per ,000 per month, or only .37 per month. Aside from any loan fees, you would save 2.13 per month.

You can do the math and apply for a debt consolidation loan yourself. Just make sure you work with a reputable bank or lender. To be safe, check them out with your local Better Business Bureau.

Debt Consolidation Service

You’ve heard the adsGet out of debt quick! Freedom from debt! We can help! They promise to help you consolidate your debts and pay them off faster.

Unlike a debt consolidation loan, which you can manage yourself, a debt consolidation service acts as an intermediary between you and your creditors. Debt consolidation services are supposed to work with you to organize your finances, and then negotiate with your creditors and convince them to lower your interest rates or offer a settlement. The negotiation is meant to ensure that you can afford to make your payments and you can pay off your debts faster. It also ends harassing calls from creditors and/or collection agencies.

The catch? Except for a very few charitable non-profits, debt consolidation services are designed to make money from you, the customer. Even the most reputable services charge substantial fees. Before you consult adebt consolidation service , you need to carefully consider whether or not you will save enough money to justify the added expense, and whether or not youd be better off calling your creditors yourself.

The fact is that the debt consolidation company has no more leverage over your creditors than you do. And if you choose to communicate with a debt consolidation service, remember these red flags, courtesy of the Federal Trade Commission (http://www.ftc.gov):

1. Scammers may charge, in addition to an up-front fee and a monthly administrative fee, a fee equal to the monthly debt consolidation payment, which is collected from the customers first payment.
2. Scammers overstate the estimated savings to the customer.
3. Their services do not necessarily reduce the consumers monthly payment or total debt.
4. They purport to be non-profit when they are not.
5. Scammers do not make any effort to improve the customers credit record, history, or rating.

If you need help figuring out complex household finances, a reputable debt consolidation service may be helpful. Just remember that its customers like you who make these companies profitable!

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