How to Avoid Debt Consolidation Loan Scams: Top Tips to Dodge Risk

Wherever there is money, despair, and desperation, you’ll find scammers. They thrive not just on ignorance and greed, but on misery and need, and in a country struggling with soaring personal debt, there’s plenty of that to go around.

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Debt consolidation scams are some of the most reprehensible scams in the financial sector, but they’re also some of the most common. Consolidation loans are a great way to escape debt when done properly and fairly, but if you hire the wrong company or place your trust in the wrong person, they can leave you with more debt and less hope.

With that in mind, let’s take a look at the most common debt consolidation scams, showing you how to spot them, how to avoid them, and how to stay safe when acquiring a consolidation loan.

What is Debt Consolidation?

Debt consolidation is the act of acquiring a large loan to repay many smaller ones, improving your financial situation by greatly reducing your monthly payments, as well as fees resulting from penalties and other charges.

It is a form of debt relief, whereby the ultimate goal is to settle your debt, avoid bankruptcy, and improve your credit score. It is not without its flaws, however, and the prevalence of scams is one such flaw.

The Most Common Debt Consolidation Scams

The first step to avoiding debt consolidation scams is to understand how these scams operate and what you need to look for. Debt consolidation scams are not as diverse or devious as scams in the debt settlement or tax debt relief sector, but they are still much more common than they should be.

These scams typically revolve around one of the following:

False Advertising

The most common debt consolidation scam isn’t a scam at all, but rather it tries to sell you a service you don’t need. Many companies claim to offer debt consolidation services, only to steer you towards a debt settlement or debt management program. 

These programs have their own merits and can be incredibly beneficial if you’re in debt and struggling with collections and delinquencies, however, it’s not debt consolidation. 

The main reason companies do this is because they want the extra traffic and opportunities that come from the debt consolidation industry. It’s standard practice, and in any other sector it would be perfectly normal and innocuous. If you search for “Nike Sneakers” and see an ad for Skechers hiking boots, you’ll take it in your stride.

Shoes are shoes, and someone looking for sneakers could, feasibly, be interested in hiking boots. The problem with the debt relief sector is that many consumers don’t know the difference between consolidation and settlement and are more prone to signing up for something they don’t need or understand.

Offering Exclusive Access

Scammers like to exploit consumer ignorance. One of the ways they do this is to announce that there is an “exclusive” government program that only they have access to, one that can help you reduce your debt quickly and cheaply. 

The Consumer Financial Protection Bureau has actually warned consumers against this practice, but it’s still very common and thousands of Americans fall for it every year.

Cold Calling and Spamming

If a debt consolidation company has contacted you out of the blue, you should stay clear. Never trust a company that relies on spam and cold calling to acquire new customers. Not only is this method popular with scammers, but it’s also used by companies with few morals and unreliable service.

They make grand promises, but it’s all a lie. They’ll claim they can get you a huge debt consolidation loan for a very small interest rate and with absolutely no strings attached. Only when you complete the initial “registration” process will you learn that the interest rate is not as great as promised, there are fees involved, or you need to hand over all your personal and financial data.

They know that a debtor is more likely to agree to their demands if they are already halfway through the registration process.

Charging a Fee

Debt settlement often requires an experienced debt specialist. They need to put the hours in and they also need to understand the process, so it only makes sense to hire them and pay for their services. With debt consolidation, however, it’s a different story.

You don’t need to pay a company to help you get a loan, and you definitely don’t need their help using that loan to clear your debts. Always be wary of for-profit debt consolidation companies that charge you for something you can do yourself.

A bank, credit card or credit union can help you with the debt consolidation process and they won’t charge you additional fees for doing so.

How to Avoid Debt Consolidation Scams

To avoid debt consolidation scams you need to remain vigilant at all times. Remember that:

  • Debt consolidation is a relatively simple service and one you shouldn’t need to pay for.
  • If something sounds too good to be true, it probably is.
  • You should never hand your financial details over to an unregulated company.
  • Ignore all spam emails and cold calls.

Warning Signs of a Debt Consolidation Scam

Debt is scary and stressful. Every debtor would love the chance to pay an expert a few bucks and have them deal with all the stress, anxiety, and paperwork. They’ll shoulder some of the burdens, provide some expertise where needed, and help you through the chaos. That’s why debt settlement is so popular and why there are so many successful companies in that sector.

However, this just doesn’t exist for debt consolidation. There are not-for-profit companies out there that are willing to help. They’ll provide advice, point you in the right direction, and advise on your next course of action should the loan application be rejected. However, they won’t undertake the process for you, and you should be suspicious of any for-profit company that does.

The biggest red flag, therefore, is a company that pushes you into making a commitment you’re not confident about, one that requires money or financial details. Trust your instinct, remember that debt consolidation is a solitary process and don’t trust anyone who tries to tell you otherwise.

Debt Consolidation Lender Scams

Even if you’ve swerved so-called debt consolidation companies and gone straight to the lender, there are still some potential pitfalls to avoid. Not all lenders are legitimate, and of the ones that are, some are more useful than others.

You might think that this is a moot point. After all, they’re the ones giving you money, so what do you have to lose? 

Much more than you think.

Do They Ask for Upfront Payments?

A scam lender may use the oldest trick in the book, promising you a substantial sum of money in exchange for a “release fee”. They rely on greed and desperation, tricking you into believing that by paying a few hundred dollars you can receive thousands or tens of thousands in return. Once you pay that money, they’ll request more, and more—they’ll bleed you dry and give you nothing in return.

A lender should give you money, not the other way around. Don’t trust any company that requests an upfront fee.

Check the Agreement

All loans require an official agreement, which details the terms and conditions of the loan. If the lender refuses to supply this, it may be a scam. If they do supply it, make sure you read it cover-to-cover. Look for unfavorable terms that you didn’t agree to and then contest them with the lender.

They may try to brush them off, telling you that it’s just “procedure” that it’s “nothing to worry about”, and other quotes from the scammer’s handbook. If you’re concerned about the agreement, have it checked over by a lawyer. 

Google Them

Google is your friend when researching debt consolidation scams. If a particular company has been scamming people, then a simple Google search will return a plethora of blacklist submissions, scam warnings, and bad reviews. If the first page of Google is filled with suspect affiliate reviews, then dig a little deeper.

A company with no reviews and no presence should also be avoided. On the one hand, they have to start somewhere and can’t create a strong Google presence out of thin air. But even if they’re brand-new and were founded just a few weeks ago, you’d still expect to find company information, promotional materials, social media links, critical reviews, affiliate reviews, staff reports, and more.

Check the BBB

The Better Business Bureau is no longer the bastion of truth and honesty that it once was. It has come under fire in recent years, with many suggesting that it allows companies to buy good ratings and chastise those that refuse. However, these issues aside, a BBB page is still an indicator that a company is not an out-and-out scam.

Effective Risk-Free Debt Consolidation

You’ve avoided debt consolidation scams, you’ve decided to go it on your lonesome and you know where to find legitimate lenders, now what?

There are a few more potential perils, a few more questions you need to ask yourself:

Legitimate Debt Consolidation

Debt consolidation typically takes one of two forms: Balance transfers and personal loans. In the first instance, you’re moving all current credit card debt to another card, taking advantage of interest-free balance transfer rates to reduce your repayments, fees, and interest. 

If all your debt is tied-up in credit cards this is arguably the quickest and easiest solution. If, however, you have loan debt in addition to credit card debt, a personal loan may be your only solution. These are not always easy to acquire and even if you’re accepted you may not find a low enough interest rate to make it worth your while.

There are specialist consolidation loan providers who provide loans for this sole purpose, but your application will undergo the same scrutiny and there is no guarantee you’ll get the loan you seek.

Alternatives to Debt Consolidation

If you’re being refused loans and you can’t get another credit card or make a balance transfer, it’s time to look elsewhere. Here are just a couple options:

  • Debt Management: The act of carefully managing your debts, often with help from a credit counselor. Debt management involves the creation of a repayment plan designed to control credit card debt, student loan debt, and more.
  • Debt Settlement: Often seen as the last resort before bankruptcy, debt settlement can clear your debt over the course of a few years and works well for debtors in collections. There are fees associated with it, but by law, these fees can’t be charged until after the debt has been settled.

Summary: Staying Safe

Scammers are everywhere in the financial sector. They latch onto debtors like cheetahs attacking their prey—stalking, waiting for the right moment, and refusing to let go once they have them in their sights. 

Remain vigilant, research companies before you agree to anything, read the small print before you sign on the dotted line, don’t expect something for nothing, and if debt consolidation doesn’t work for you even after avoiding those scams and pitfalls, don’t despair. There are many other ways you can clean your credit report, beef-up your credit score, and improve your outlook.