How to Avoid Debt Consolidation Scams
Updated – January 14, 2019
If you’re in significant debt, the prospect of becoming debt-free can be alluring. So alluring, in fact, that you might find yourself caught in any number of scams along the way.
One common way to pay off debt is through consolidation. This involves combining all your debt and taking out a loan that goes toward paying it off each month. Debt consolidation can help simplify and streamline the debt payoff process, and it might even save you a little bit of money, too.
Still, the debt consolidation industry is rife with scams. Companies might say they offer debt consolidation when, in reality, they’re for-profit debt settlement companies looking to take advantage of people.
What is debt consolidation?
Debt consolidation involves combining all your debt and taking out a loan to pay off that chunk of debt each month There are a handful of ways you can consolidate your debt.
Personal loans are fairly easy to qualify for — you don’t often need an exceptional credit score — and typically come with repayment terms of 24 to 60 months.
Home equity loan or home equity line of credit (HELOC). If you hold significant equity in your home, you could take out a home equity loan or HELOC to put toward paying off consolidated debt. But this path is somewhat risky as you’re putting the roof over your head on the line.
Only consider this option if you’re certain you can quickly and efficiently pay off your debt.
Loan from a bank or credit union. Personal loans can be secured online or from local banks and credit unions. If you have a history with a particular bank or credit union in your area, meaning you hold several accounts there or have taken out loans there before, consult it to see what types of personal loans it offers.
Loan from a family member or friend. If you don’t hold significant debt and all the loans you’ve looked at have super-high interest rates, you could consider reaching out to a close family member or friend. It goes without saying that this path is precarious and should only be taken if you’re certain you can repay the debt — after all, your relationship with this person could be jeopardized if you don’t.
7 warning signs of a debt consolidation scam
When searching for a way to consolidate and pay off your debt, you might come across companies online that promote debt consolidation.
But some of these companies aren’t offering to help you with debt consolidation. Instead, they’re debt settlement companies masquerading as debt consolidation companies, and they’re looking to take advantage of you. Debt settlement can be legitimate, but it’s an industry that is full of scams. And even when it is legitimate, it’s a serious step that can hurt your credit for years.
Below, you’ll find a handful of common warning signs that you might be dealing with a scam.
You’re asked to make a payment when nothing has been done yet
If you’re receiving legitimate financial counseling services from a company — such as a budget review or practical financial advice on which you can act — then it’s perfectly acceptable to pay for those services, said Bruce McClary, vice president of communications at the National Foundation for Credit Counseling (NFCC).
But McClary said if you’re dealing with a for-profit debt settlement company, you might be asked to send them money upfront. It might say that it’ll hold it in an account on your behalf while it communicates with your creditors.
“It’s a very tricky and complex situation because it puts you, the consumer, at risk in a number of ways,” McClary said. “[If] they’re asking you to make payments each month and they’re not sending those payments on to your creditors, not only can you fall further behind, but those payments are piling up in an account that they have. So you’re turning the money over to this company without having received any tangible services at that time.”
You feel that the company’s actions are pushy or aggressive
If you get a pushy or even aggressive vibe from the company, you might be dealing with a scam, according to Kathryn Bossler, a credit counselor with GreenPath Financial Wellness, a nationwide consumer credit counseling agency.
“Any legitimate company is going to be able to present your options to you, and you should not feel that pressure to start,” she said.
You’re told to cease contact with your creditors
Another red flag, noted Bossler, is if the company you’re considering partnering with tells you to stop communication with your creditors.
“That’s not something we would ever recommend to our clients,” Bossler said. “We always think it’s best to leave those lines of communication open.”
You’re told to stop paying your bills
Debt settlement companies often tell consumers to stop paying their bills while in the program. This can be consequential as it can lead to a mountain of late fees and interest.
If a company tells you to stop paying your bills, you’re likely dealing with a debt settlement company, not a legitimate debt consolidation program.
The company is hesitant to share information with you
If you feel as though the company you’re working with is hesitant to provide information, be skeptical.
“If the organization you’re working with or thinking about working with isn’t willing to put the terms of their service in writing and give it to you before you make any sort of commitment — especially before you pay any fees — that’s a red flag right there,” said McClary.
A legitimate company wouldn’t do this.
“Any financial counseling organization that’s offering some kind of debt relief program or debt repayment program should be willing to put all of the terms of the program in front of you and let you know exactly how the program works before they ask you to part with your money for those services,” he added.
You get an unsolicited offer from the company
McClary said a major red flag is if you receive an unsolicited call or piece of mail from the company.
“Any legitimate financial counseling or financial education organization, especially those that are nonprofit, they are not going to be cold-calling you and bothering you with robocalls and unsolicited mail to present their services,” McClary said. “In fact, nonprofit credit counseling organizations can’t do that.”
The company makes promises about lowering your total amount of debt
If a company promises that it’ll lower your debt significantly, you should be cautious.
“If they’re making a guarantee around paying off less than you owe, it’s more likely than [not] a settlement company,” Bossler said.
How to avoid a debt consolidation scam
If you’re looking to consolidate your debt and are worried about getting caught in a scam, don’t worry. There are steps you can take to make sure the company you’re dealing with is legitimate.
Do your research
Research is your friend in this process. McClary advised looking up the reputation of the company with the Better Business Bureau and checking to see if any complaints have been filed with your state’s attorney general.
“You also want to make sure they’ve been in business for a while and at least have some established reputation,” McClary said. “And that they’re licensed to do business where you live.”
Seek multiple offers
When searching for a debt consolidation loan, it’s wise to cast a wide net. Besides searching for loans online, consult your local banks and credit unions.
Compare those offers
Once you’ve sought multiple offers, compare them. Ask yourself certain questions:
- Which one has the best interest rate?
- What are the origination fees for each?
- Which one has the best repayment terms?
- What is the minimum credit score required for each?
Get everything in writing
“If the company puts it in writing and gives you the terms and conditions of the program and spells it out exactly upfront and somehow the services they delivered are a mismatch, that gives you the power to go after them,” McClary said. “Not just for the money they took from you and held in the account, but also for any damages. I can’t say enough: Get everything in writing.”
If debt consolidation is not the answer
Because the debt consolidation industry is full of scams, you might be nervous to even dip your toes in the water. If that’s the case, there are other paths you can take to pay off your debt.
Balance transfer credit card. If the debt you hold is high-interest credit card debt and you think you can pay it off quickly, you might want to consider a balance transfer credit card. Balance transfer credit cards typically have introductory interest rates as low as 0%, which could save you money in the long run.
Credit Counseling. Working with a nonprofit credit counseling agency to create a debt management plan can help you pay off your debt while also learning about good financial habits. You simply pay the agency each month and it disburses the payment to your various creditors. You can search for a nearby credit counseling agency using the NFCC’s online tool.
Debt Settlement. Although the debt settlement industry is overflowing with scams, it might be a last resort for some people who want to settle significant debt before considering bankruptcy — just make sure you’re dealing with a legitimate company, and know that debt settlement could impact your credit score for years to come.
Negotiate your debts on your own behalf. If you just have one, two or maybe even three accounts, you can negotiate with your creditors yourself. This allows you to avoid partnering with a potentially predatory debt settlement company.
“If you want to settle your debt, debt settlement is something you can do on your own,” McClary said. “You can contact the creditors and work out a payment plan that involves a solution without even dropping a dime for anybody.”
Although the prospect of paying off significant debt can feel overwhelming, it’s a step in the right direction. Take a deep breath, relax and imagine how good life will feel once you’re debt-free.