Debt consolidation loans can serve as an important tool for consumers struggling with mounting debts. But consumers who aren’t careful might make their financial situation worse, rather than better, when they work with a debt consolidation company. Consider the case of Freedom Financial Management, a debt consolidation firm based in California. This company allegedly overcharged several hundred South Carolina residents, according to a recent story on The State news site. The company must now return a total of $839,000 to those customers by this fall. What happened? Desperate consumers, eager to cut down on their mounting debts, signed up to work with Freedom Financial without first researching either the company or their own state’s credit counseling laws.
Critics of debt consolidation loans often point to what they say are high interest rates and excessive fees charged by companies in the industry. There is truth to this: Many debt consolidation companies do charge sky-high fees. But consumers have the power to avoid these companies. The first step? They should always require any debt consolidation company with which they are considering working to list all of their fees and interest rates in writing. This way, there will be no surprises. They should then check with their state’s attorney general’s office or department of consumer affairs to see if there are any limits to the fees that debt consolidation companies can charge. If the consumers in South Carolina had done this, Freedom Financial wouldn’t have had such an easy time overcharging them.
High Fees in South Carolina
South Carolina law requires debt consolidation firms to obtain a license. The law also limits the fees that these companies can charge. According to the story on The State Web site, such companies can charge no more than $50 for an initial consultation. Financial Freedom did not have a license to conduct business in South Carolina, according to the state’s department of consumer affairs. It also charged monthly fees that are higher than allowed under the South Carolina Credit Counseling Act. According to the news story, the company charged one state resident more than $29,000 for its services. This resident, along with 362 other South Carolina residents, are due to receive checks from Freedom Financial by Oct. 11. Most of these customers paid from $1,000 to $2,000 too much for the services they received from Freedom Financial, according to The State.
An Important Lesson
The Freedom Financial case should serve as an important reminder to consumers: Debt consolidation loans can be effective tools in dealing with skyrocketing debts. But if consumers don’t do their homework first, they could end up losing a significant amount of additional money.