Here at LendUp, we want to make sure that our customers are informed about all their credit options. And since we’ve recently heard some examples of consumers getting caught in debt traps by debt consolidation companies, we decided to put together a handy guide to help if you’re considering debt consolidation.

First, a bit of background: A debt consolidation company typically helps borrowers pay off debts by offering a single loan that’s then used to replace multiple outstanding debts. Normally, the company will work directly with the borrower’s original lenders to lower the interest rate on the existing loans or debts. The borrower will then make payments only to the debt consolidation company. This may be a good option for some, as it combines all debt into one place and may allow borrowers to pay down balances more quickly, sometimes at a lower rate.

However, some debt consolidation companies do not negotiate for lower interest rates and instead provide a loan at the same interest rate but with a longer term. This means that while your monthly payments may be smaller, you could end up spending more money — because if the term is longer, you’ll pay more in interest over time (even if the rate is unchanged).

So before you decide to work with a debt consolidation company, here are a few things to keep in mind.

  1. If the company is legitimate, it should be open and honest and provide you with a detailed description of the services they offer — even before they know about your personal situation. If the company won’t answer your questions, go elsewhere.
  2. A reputable debt consolidation company should provide useful advice about managing your money and be interested in helping you create a budget. Many even offer free workshops or education courses.
  3. The costs should be reasonable. Normally, this means paying no more than $50 a month for a debt management program. Look for a company that’s been in business for several years and, if at all possible, try to work with a non-profit organization (where services may be less expensive or even free).
  4. Remember that the debt consolidation company works for you, so research and interview multiple companies. Treat them as if they’re someone you’re hiring for a job — because you are. After speaking with several, review your notes and choose the one with which you’re most comfortable. Make sure that you also get all services and offers in writing before agreeing to anything.
  5. Think about whether a debt consolidation service could have a negative impact on your credit history. For example, if a debt is marked as “settled,” this could be seen as a negative because that normally means it was repaid for less than the original amount owed.
  6. Lastly, if you are working with a debt consolidation company, be sure it’s actually making payments on your behalf as promised. Remember that the debt is still your responsibility until it’s paid back in full.

Before you decide that debt consolidation is for you, you might consider credit counseling first. Read more about credit counseling to learn more.

Is there an area of personal finance that you’d like us to cover in a course or Fast Financial Fact? Where do you struggle with managing your finances? We’d like to know! Or are you an organization that’s interested in collaborating? Please get in touch at education(at)lendup(dot)com.

Disclaimer: LendUp is not providing financial, legal or tax advice. If you need or want such advice, please consult a qualified advisor.