What Is a Debt Consolidation Company?
Debt consolidation is the process of combining several debts into one debt. Typically, this is done through a debt consolidation loan. For example, if you owe a total of $10,000 on four credit cards you might get a $10,000 debt consolidation loan to pay them all off. Now you have just one payment to make each month—and ideally at a much lower interest rate.
Many regular banks and credit unions offer these loans, and consumers who want to consolidate their debts can often manage the process on their own. But there also are debt consolidation specialists who reach out to those with high levels of debt to offer loans or say they can get you one. Some of these companies are legitimate, but many are scams that could harm your credit, charge you excessive fees, jeopardize your personal information, or simply steal your money.Legitimate debt consolidation companies will only make contact after someone has expressed interest, don't charge upfront fees, are accredited, and don't make promises or guarantees.
Key Takeaways
- Legitimate debt consolidation companies initiate contact only after someone has expressed interest.
- Accreditation from reputable organizations such as the Better Business Bureau (BBB) or the National Foundation for Credit Counseling (NFCC) is an important indicator of a legitimate company.
- Legitimate debt consolidation companies do not charge large upfront fees before providing any services.
- Be cautious of companies that make unrealistic promises or guarantees.
- Research and read reviews from reputable sources to gain insights into the experiences of other customers.
Signs of a Legitimate Debt Consolidation Company
The key to avoiding debt consolidation scams is recognizing the signs that indicate a debt consolidation company is not legit.A company that is on the level will be characterized by:
Clear and Transparent Communication
A reputable debt consolidation company will be clear in explaining what it can and can't do to help you with your debt. It will not make unrealistic promises.
For example, a debt consolidation company will not negotiate with your creditors to get you a lower interest rate or erase your debts. Companies that make such promises are properly called debt settlement or debt relief companies (although some may refer to their services as "debt consolidation"). Some debt settlement companies, most of which are for-profit businesses, are legitimate, while others are outright frauds.
In addition, if a company reaches out to you out of the blue, by phone, mail, or email, it's highly likely it could be a scam. Legitimate debt consolidation and debt settlement companies typically do not engage in unsolicited offers or cold calling. Instead, they follow up only after a consumer has expressed interest in their services.
Accreditation and Certification
For any debt consolidation company, lender, or organization you consider working with, check for certifications and licenses that demonstrate its compliance with industry standards.
For example, the National Foundation for Credit Counseling (NFCC), is a nonprofit organization of credit counseling services whose members must go through a certification programshowing they meet its standards. These counselors often create debt management plans, which don't eliminate your debts but can make them easier to pay off.
The Better Business Bureau (BBB) is another source to check the credibility of a debt consolidation company or organization. Businesses can apply to be accredited by the BBB, and it posts ratings based on consumer feedback and other factors.
In the case of lenders or loan companies, you can check with your state's attorney general's office or banking department to make sure they are registered to do business in your state, as they are required to be.
No Upfront Fees
If a company asks for money upfront before discussing your situation with you or providing any services, run, don't walk, away. This is a major red flag with debt settlement companies, some of which may misrepresent themselves as providing debt consolidation.
Nonprofit credit counseling organizations charge only modest fees and may provide many services for free.
Realistic Claims and Guarantees
Getting a debt consolidation loan requires meeting a lender's eligibility requirements. Depending on your financial situation, you may not qualify for a loan or qualify for enough money to consolidate all of your debts.
Therefore, if a company makes bold promises or guarantees, such as eliminating all debt or improving credit scores overnight, be wary. Legitimate companies provide realistic expectations of debt consolidation and work within the confines of the borrower's financial situation.
And, again, you can always apply for a loan on your own, without the assistance of a debt consolidation company. Some lenders will even "pre-qualify" you, giving you a good idea of your likelihood of obtaining a loan before you file a formal application.
Beware of unsolicited sales calls from telemarketers that tell you that you've been selected for a special loan or balance transfer offer and ask for upfront payment or personal information as these are often scams.
6 Red Flags of Debt Consolidation Scams
In addition to the above, these are additional red flags to watch for in order to avoid a debt consolidation scam.
1. High-Pressure Sales Tactics
If a company uses aggressive sales tactics to coerce you into working with them, walk away. Legitimate debt consolidation companies will never push you to work with them or make decisions you aren't ready to make. Instead, they should allow you time to thoroughly understand the terms and conditions of a debt consolidation loan.
2. Request for Personal Information
Be wary of companies that ask upfront for sensitive personal information such as Social Security numbers or bank account details. While legitimate companies many need some of this information for a debt consolidation loan application, they won't push for it right away. It's crucial to protect your personal information and only share it with trusted and verified entities.
3. Lack of Transparency
Legitimate companies provide clear and detailed information about their services, fees, and terms. If a company is evasive or unwilling to provide understandable answers to your questions, it is very likely a scam.
4. Instructions to Stop Paying Your Creditors
Debt consolidation, unlike debt settlement, is intended as a way to pay off your creditors, not to negotiate all, or some portion of, your debts away. Some companies may advise you to stop paying your creditors and send your credit payments to them instead. Supposedly this is a way to give them negotiation leverage over the creditor.
But beware of any company, even a seemingly legitimate one, that suggests this. As the Consumer Financial Protection Bureau warns, "If you stop making payments, you will likely damage your credit. You may face collection efforts, additional late fees, and penalty interest charges, and you might be sued. These fees and charges will cause your debts to grow larger."
5. Instructions to Stop Talking to Your Creditors
Similarly, dubious debt consolidation companies may tell clients to stop communicating with their creditors. Doing so could lead to hefty fines and collection actions.
Legitimate debt counselors are more likely to tell you to notify your creditors of your financial difficulties because the creditors may offer remedies to help you pay your debt.
6. Promises of Access to a "New" or "Special" Government Program
There are no special government programs for debt consolidation. Both the Federal Trade Commission and the Consumer Financial Protection Bureau warn that any company making this claim should be avoided.
How to Avoid a Debt Consolidation Scam
Follow these tips to avoid a debt consolation scam.
- Research Different Companies. Don't go to the first company you find in your search. Check several, review their accreditations, and ask for referrals.
- Compare Multiple Offers. Shopping around with at least three different debt consolation companies is the most effective way to find the best loan terms to consolidate your debt.
- Read the Fine Print. Make sure you know all the terms of any debt consolidation loan and understand how much you will pay each month, the interest rate, when payments are due, and how long you will have to make them.
- Ask About Fees. Find out how much you will pay to consolidate your debt. Make sure the fees don't just add to your debt.
- Get Everything in Writing. In the event that problems arise, you'll have proof of what you are responsible for as well as what the company is supposed to do on your behalf.
- Don't Provide Payment Upfront. Legitimate companies will never ask to be paid for their services upfront, although some credit counselors may charge a modest enrollment fee.
How to Research Debt Consolidation Companies
Here are some key ways to determine whether a debt consolidation company is legitimate:
- Check Online Reviews and Ratings. You can check out specific debt consolidation companies by name online at the BBB or the Consumer Financial Protection Bureau's Consumer Complaints Database. Reviews can provide insights into the experiences other customers have had with the company.
- Verify Accreditation and Licenses. Verify the accreditation and licenses of a debt consolidation company or organization through official websites or directories such as the NFCC, the BBB, or your state attorney general's office.
- Seek Professional Advice. A credit counselor, accountant, or financial planner may be able to provide referrals to reputable debt consolidation companies or potential lenders.
What Is a Debt Consolidation Loan?
A debt consolidation loan is a personal loan you take out to pay off multiple debts. Ideally it will have a lower interest rate than the debts you are paying off.
What Are the Disadvantages of Debt Consolidation?
If your credit score is low, the interest rate on a debt consolidation loan could be similar to what you have on your existing debts, so it might not save you any money. In addition, if you can't get a loan that's large enough to cover all of your debts, you may still have to manage multiple payments.
How Can I Verify the Legitimacy of a Debt Consolidation Company?
You can check to see if the company is licensed or accredited through such agencies as the NFCC, the BBB, or your state's attorney general office.
What's the Difference Between Debt Consolidation and Debt Settlement?
Debt consolidation is the act of combining multiple debts into one debt. Debt settlement involves trying to settle, renegotiate, or change the terms of your debt in an effort to reduce how much you owe.
How Do I Secure My Consolidation Loan?
Debt consolidation loans typically are unsecured personal loans that do not require collateral.
The Bottom Line
Legitimate debt consolidation companies work to help you get out of debt. They typically are accredited or licensed by reputable agencies, and they won't push you to do something you are uncomfortable doing or that is likely to make your credit situation even worse. Bear in mind, too, that they may not be able to do anything for you that you couldn't do on your own.
