Is A Free Debt Consolidation REALLY Free?

So how does 'free debt consolidation' work?

On this page, I'm going to do just one thing ... give you a warning.

Here it is. In the world of loans, mortgages and debts there can be a lot of money to be made. In the world of bad debts and free debt consolidations, there can be even more.

Why is this so?

Simply, the long terms and conditions that you sign when a loan is taken, usually has a little, well hidden term or phrase that points you in the direction of another document from the company should you fail to maintain payments on your debt. The exact nature will differ from country to country and company to company.

However, that second document will outline the fees, penalties and charges made to people who don't pay. The headline fees are always really competitive. We've all seen the offers, 'no application fee' or whatever. These charges have to be competitive for the firm to win new clients. But, fees made to people that don't pay can be as ruthless as they feel is required and can (and usually will) be increased every year above and beyond inflation.

In short, if you aren't paying or get into financial trouble, it could become very expensive very quickly.

Added to this, people with debt problems usually need to find less and less competitive lenders to help them as the risks of lending become ever greater. To help compensate for these greater risks, companies charge much larger than average fees. This means that they can pay the person who sells the loan a much larger commission.

When I used to work in the UK mortgage industry, I would earn perhaps five times as much commission for using a 'bad debt' lender as I would for placing business with a major bank. On one occassion, I recall earning more from one self certified mortgage than I did from all the other mortgages and life assurance policies that I sold during the rest of the month!!

The area I worked in didn't have much bad debt or poor credit problems which meant that I did these 'bad debt' mortgages once ot twice per year. But, on the few occassions that I did do this type of business, it was like earning a bonus cheque!

Here's the rub: bad debt pays well.

There is no such thing as a free lunch - especially not in finance. I can't judge for every situation, but free debt consolidation, in my experience is very rarely going to be 'free'. Most of the time, I would expect it to be very expensive in hidden costs, fees and potential consequences.

Do your best to read the terms and conditions of your new loan carefully. They were written by a very smart lawyer and are legally binding. You can bet that the lender will take those terms seriously, even if you do not.

Though the broker or adviser will probably be doing their best to offer assistance to you at a difficult time, a free debt consolidation will probably pay a very worthwhile commission for their efforts.

Compare the terms and interest rates carefully between providers. But of course, if you have been a little too silly with the spending, you may be at the lender of last resort and no other options open to you.