How to spot a debt consolidation scam

When searching for a way to pay off debt, watch out for these warning signs to help you identify and avoid a debt consolidation scam.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

While most debt consolidation companies adhere to fair practices, there are firms out there that prey on people desperate to get their finances under control. Falling for a debt consolidation scam can put you farther in debt and cause additional problems down the line.

Debt consolidation is a somewhat simple process. It basically combines all your debts and pays them off using a single new loan. Although this can be useful for many people looking to start fresh, you also have to watch out for scams by disreputable companies.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Before you let somebody deal with your debts, make sure you carefully review any documents you have to sign. Look at the payment schedule and how your instalments are handled. Does your money go directly towards the loan principal or will you be paying interest first? This can make a big difference on how much you’ll end up paying back in the end. 

Here are four red flags that might indicate you’re facing a debt consolidation scam:

A guarantee to eliminate all your debt

Debt consolidation gets you into a new debt in order to pay off your old ones. That alone means you won’t be debt-free right away, so anybody promising that is lying. The ultimate goal of debt consolidation is to help you lower your monthly interest and payments. At the end of the day, however, you will still owe the same amount you did before. The only difference is that you will owe it to just one creditor rather than many. 

You should also be wary of one-size-fits-all debt repayment plans. You want a company that will sit with you and evaluate your unique situation. A promise of “we can erase your debt” before anybody even looks at your numbers should make you suspicious.

The company charges upfront fees

Another way to spot a debt consolidation scam is to look at how a company charges you for their services. Debt repayment companies usually work on a percentage basis. StepChange Debt Charity, which offers credit counselling and debt repayment advice, estimates that the average company charges around 17% of your monthly instalment. This means that before a company can settle on a price, they will have to calculate your total debt and your monthly payments. Only after that they can tell you the amount you will pay every month as their fee.

If the company you’re talking to is asking for an upfront fee, that’s a red flag. These fees can sometimes be labelled as processing fees, handling fees, or account setting fees by the company. But no matter what they’re called, insist on working on a percentage-based fee or walk away. 

They promise to improve your poor credit score right away

Another easy way to identify a debt consolidation scam is to look out for big promises. While paying off debt is an important step towards repairing your credit, this won’t happen overnight. It won’t happen over a period of days or even weeks either. That’s because paying old debts is only part of improving your credit score.

Another important factor in your credit score is showing that you can pay your bills on time. Even after settling the old debt, you still have to pay new monthly bills on time for a while before you’ll see a change in your credit report.

They advise you to stop interacting with creditors

There’s absolutely no reason for you to stop contacting your creditors and debt collectors once you consolidate your debt. In fact, it makes sense to call creditors to confirm they received payments and things are in order. If you had debts in collection, a quick phone call or email to confirm the debt has been settled isn’t a bad thing either.

You can spot a debt consolidation scam by the way a company tells you to deal with it. They might recommend to leave things alone, but if you choose to communicate with debtors, they should offer guidance. A refusal to let you be part of the process could be a sign of financial fraud.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »