If you've been struggling under a burden of credit card debt or a combination of credit card debt, a car loan and student loans, you might be tempted by a phone call or an ad that tells you it will be quick and easy to consolidate and eliminate your debt. As with any other financial matter, a "buyer beware" approach is mandatory. While debt consolidation can be a legitimate way to regain your financial footing, the world is also unfortunately full of scammers who prey on consumers with money woes. Before you fall victim to a scam, you can start by determining whether you need debt consolidation help or can handle the problem on your own. If you choose to seek assistance with your debt problems, pay attention to these tips before you sign any papers or agree to a debt consolidation plan.
Red Flags that Indicate a Debt Consolidation Scam
Before you begin comparing debt consolidation loans, make sure you understand that debt consolidation means that a company or a lender will buy all of your debt – the balance owed on your credit cards or other loans – and you will repay that company with one monthly payment, hopefully at a lower interest rate. Some indicators that the company offering to consolidate your debt is not legitimate include:
- You're told that your loan approval is "guaranteed" or "highly likely"
- You're asked for an upfront payment before the loan is approved
- You're told that this will be a "quick fix" when it will take time to repay your debt
- You're asked to provide access to your bank account so the company can make automatic withdrawals
- The contract says you can only sue the company in certain states – and not the state where you live
- The company only has a P.O. Box and not an office address
- The company tries to convince you to take a debt settlement rather than pay off the debt, which could hurt your credit
- The company representatives rush you or aggressively ask you to sign papers before you have had a chance to review them
How to Choose a Legitimate Debt Consolidation Loan Program
Before you choose a debt consolidation company, it's essential that you take the time to do your homework to avoid a scam and to get the best possible outcome for your financial health.
Check out the company's reputation with several places, including the Better Business Bureau (BBB), the state attorney general's office and your local consumer protection agency, and see if the company is registered with The Association of Independent Consumer Credit Counseling Agencies or The National Foundation of Credit Counseling. Do an Internet search with the company's name and the word "complaints" to see if there are customer complaints or lawsuits against them. Find out if the company is licensed to provide services in your state.
Next, research the services provided by several companies and how much they charge.
Once you have a sense of which companies offer legitimate debt consolidation services, compare specific offers from more than one company.
You'll need to do some math to decide which debt consolidation loan is best for your needs. The LendingTree debt consolidation calculator can help you evaluate various debt consolidation loan offers.
Compare the fees from one company to another, the interest rate and the term of the loan, as well as the monthly payment. Not only should you compare one debt consolidation offer to another, but you should carefully compare your current repayment schedule and the interest you're paying to make sure that consolidation is the best solution. If the interest rate is lower and the repayment term is extended so that your monthly payments are lower, you could still end up paying more in the long run if the fees are high or you're paying interest for a longer time. When it comes to choosing the right way to manage your debt, you need to look at both the short-term goal of an affordable monthly payment and the long-term goal of becoming debt-free.