How to Avoid Debt Consolidation Scams
At a Glance
Debt consolidation can be a valuable tool to help borrowers streamline and simplify debt payments. But debt consolidation scams can compromise your personal information, cost you money, and even wreak havoc on your credit score. So it’s important to know what red flags to look out for to learn how to avoid debt consolidation scams.
In this article, you’ll find:
What is debt consolidation?
Debt consolidation is the process of combining multiple debts into a single new loan. The most popular tools for individuals to pursue debt consolidation are balance transfer credit cards and personal loans. The best debt consolidation personal loans will be offered to those with great credit, but borrowers may also be able to find a debt consolidation loan with bad credit.
If you have a lot of debt or find yourself in a more complicated situation, you may want to seek out assistance. That’s where a debt consolidation company comes into play.
Debt consolidation vs. debt settlement companies
Debt settlement, also referred to as debt relief, differs from debt consolidation in that you’re attempting to negotiate with creditors to pay less than what you owe. The process of debt settlement is typically to stop paying creditors. Then, the settlement company attempts to get creditors to settle for a lower amount.
The obvious downside to debt settlement is that ceasing payment to creditors is going to cause damage to your credit score. You may also be sued by creditors who want their money. So if the path of ultimately paying less than what you owe seems appealing, debt settlement companies are available to help with the process. They typically do so by having you make payments into an account that they’ll then use to negotiate with creditors.
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How to spot debt consolidation loan scams?
There are many red flags to look out for when it comes to debt consolidation companies. Keep an eye out for these to avoid debt consolidation loan scams.
1. The company guarantees they’ll lower the amount you owe
The process of debt consolidation takes existing debt and combines it into a single loan. So no changes are made to the actual balance due. Any company that claims to be able to lower what you’ll actually need to pay to your creditors is likely a debt settlement or debt relief company. Or they may be operating a credit consolidation scam.
2. The company is pushy and requires you to act now
Deciding whether or not to consolidate debt is a big decision. And companies that are forcing you to sign up for a program immediately should throw up a big red flag.
3. The company asks you for an upfront payment
If you pursue debt consolidation yourself, you may have a loan origination or balance transfer fee. But unless a company has successfully reduced your rates or settled debts, there shouldn’t be any reason for fees.
4. The company refuses to let you see their terms
Reputable debt consolidation companies have no problem disclosing fees, terms, and conditions. If the company is sketchy about what information they’ll provide, it’s time to cut off communication.
5. The debt consolidation company contacts you
Reputable non-profit debt consolidation companies will let you come to them. But mailers or phone calls may come in from debt consolidation scam companies. So if you receive one of these inquiries, be wary. And always follow the below steps before signing on for a service that ends up being a scam.
6. The company asks you to stop paying your bills
Sometimes, a debt settlement scam may insist you stop paying your bills and instead, send your payments to them. This “tactic” is used to put more pressure on your creditors and convince them to settle faster since they are no longer receiving any payments. However, your debt will most likely just be sent to collections.
7. The company tells you to cease contact with your creditors
Generally, it’s not a great idea to end all contact with your creditors, even if you’re behind on payments. They may be able to offer you a payment plan or other options to help you get back on track, and ceasing all contact can actually lead to more severe consequences in the future (such as legal action).
Dos and don’ts to avoid debt consolidation scams
People have come across every type of scam, from student loan debt consolidation scams to credit consolidation scams. Often, the companies are making impossible promises that seem too good to be true. Before you go forward with any debt consolidation company, take these three steps to avoid scams entirely.
Debt consolidation dos
DO: Research the company online
When researching debt consolidation companies online, look for consumer reviews and ratings through the Better Business Bureau. As you review the company website, be sure the web address starts with https, and there’s a lock symbol in front of it. That means any information you send is secure. You’ll also want to be sure the website lists a physical address for the company, and the site is mostly free from error messages, typos, and other common signs of a scam.
Additionally, be sure to read online reviews and accreditations. Look for reviews from previous and past customers, as well as accreditation with organizations like the Better Business Bureau (BBB).
DO: Compare multiple offers
Once you research companies and have found legitimate contenders, it’s essential to compare specifics side by side. That means looking at things like debt consolidation loan requirements, which may include credit score minimums and fees. Once you dig into the details, it often becomes obvious which debt consolidation company is the best option.
DO: Read the fine print
You will receive a written agreement from a reputable debt relief company that outlines what you can expect and what happens if things don’t go as planned. Be sure you get everything in writing before you sign up with a debt relief company and read the contract carefully so there are no surprises down the road.
DO: Call your creditors
Your creditors may have helped other borrowers work through debt consolidation and have recommendations for legitimate companies. They’ll also likely be aware of scams and can alert you before you start working with an illegitimate company.
Debt consolidation don’ts
DON’T: Provide payment up front
It’s actually illegal for a debt relief company to request or require payment until they’ve provided a service. If the company does require payment up front, do not make the payment. And, you should avoid signing up with that company.
DON’T: Feel pressured to sign up
Some debt relief companies, especially those that are scams, use pressure, fear tactics, and other emotional triggers to get you to sign up. They can make it seem like they are your only option and try to scare you into making a decision. However, if a company uses this type of sales tactic, don’t feel pressured and instead, find a different company.
DON’T: Forget to ask about fees
Like lenders, debt relief companies have their own fees and terms. Don’t forget to ask what those fees and terms are so that you can be prepared in both the short- and long-term.
Debt consolidation scam examples
The Federal Trade Commission (FTC) works hard to find and shut down debt consolidation scams. Some recent schemes they’ve been able to stop in the last few years include:
- In 2017, the FTC worked with Florida to shut down 11 connected companies that scammed tens of millions without negotiating debt for customers. The settlement was $35 million.
- In 2018, the FTC reached an $11 million settlement with a company that promised to help reduce student loan costs (one service being debt consolidation) but failed to deliver. The ringleader of the company was also permanently banned from the telemarketing industry.
- In 2019, the FTC forced Arete Financial to stop operations after they allegedly charged illegal upfront fees on fake student debt relief programs (such as debt consolidation).
Also in 2019, the FTC stopped a student loan debt relief scam that allegedly stole more than $23 million while promising to consolidate student loan debts and lower monthly payments.
The FTC also returned more than $5 million to customers who paid money to fake student debt relief companies that promised debt consolidation and/or debt settlement while also charging illegal upfront fees.
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FAQs
Debt relief is different than debt consolidation. While some debt relief programs are reputable, it’s an industry rife with scams. Some red flags to alert you of a scam are if companies request payment upfront, promise to reduce or eliminate your debt, or withhold information about services until you provide payment.
When done properly, debt consolidation won’t ruin your credit. In fact, it can actually help boost your credit score. That’s because moving from multiple monthly payments to just one often increases a borrower’s likelihood of making on-time payments. Plus, it can help lower overall credit utilization, which may boost your score a few points as well.
Some ways to safely consolidate debt include using a balance transfer credit card (especially for credit card debt), taking out a debt consolidation loan, tapping into your home equity through a home equity loan or home equity line of credit, or borrowing from your 401(k). Or, if you don’t want to take out new credit, consider the debt avalanche or debt snowball methods to pay down your debt.
Learn more: How to Consolidate Debt?
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