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How to avoid debt consolidation scams

How to avoid debt consolidation scams
(Image credit: ShutterStock)

If you're struggling under the weight of your debt, approaching the best debt consolidation companies might prove the most important step you take in moving toward a future that is eventually debt free. However, when looking for a service through which to consolidate your debt, remember that, as with most things in life, if it sounds too good to be true then it probably is. That’s why scams involving debt consolidation are rife.

Here are some of the things to be aware of:

1. Student debts

Accounting for more than $1trillion of debt in the US, student debt can be incredibly common. But if your loan is federal there are plenty of options to help you change your monthly payments without paying a fee.

Some companies may advertise that they can help you consolidate loans, but it’s actually free to do this through the government. If a company suggests that it can help you but you must pay a processing or administration fee – avoid!

Is your student loan with a private provider? You should still be able to speak to them directly if you’re having trouble making repayments and they could help you come up with a new plan.

Beware if a company asks you to stop making payments on your loan, or if they say that they are affiliated with the Department of Education. Both are sure ways to a scam.

2. Advance fees

Similar to student loans, no company should be asking for an advance fee (if they’re in the U.S. or Canada), it’s illegal according to the Federal Trade Commission.

In previous years unscrupulous companies were found to take an advance fee and then refuse to do any more work. This practice has now been overhauled so watch out for anyone who claims it is still standard.

You should also check whether the company is claiming to have non-profit status, the FTC has exposed a scam where companies were funneling cash away despite looking outwardly like a debt management company.

3. Excessive fees

So that there are no surprises at the end of your debt consolidation road, make sure to ask about all fees charged (or loan interest approved) and get a copy in writing. Some companies may help you pay down your debt then slap exorbitant fees on the end. Before entering into a contract you should have a prediction of the final fees that you are due to pay and make sure that you’re happy with this figure before agreeing.

4. Claiming to work with creditors

When doing your research on how to consolidate your debt, it may just be worth a couple of quick phone calls to check that your creditors have worked with this company before. 

They may claim so on their website, but a quick phone call to check could save months on the time it takes to negotiate a reduction.

Gina Clarke
Gina Clarke has worked in journalism for over a decade for titles such as The Daily Mail, The Sun and Forbes. She began her career in BBC radio and now specialises in subjects such as financial technology and women’s health.