Debt Consolidation Loan Scams

Desperation is often the reason that people apply for a debt consolidation loan. They have more debts than they can handle, so they apply for a debt consolidation loan to consolidate their debts and to stop the collection agents from calling.

Unfortunately this desperation makes people more likely to fall for some all too common debt consolidation scams. Here are some of the scams, how to spot them, and what you can do to avoid them.

The Money Up Front Scam

In this scam, you are promised a debt consolidation loan, despite bad credit or a previous bankruptcy. However, there is an "administration fee" or "processing fee" or "application fee" that you are require to pay up front, which can be as much as three times your monthly loan payment, or even more.

You pay the money, and then either you either never hear from the debt consolidation loan company again, or they tell you that there was a problem with your application, such as you forgot to tell them about one of your debts, so they can't give you the loan, but they keep your application fee.

Avoiding this scam is simple. Never pay an upfront fee to apply for a loan. Many mortgage brokers and debt consolidators charge a fee, but they only get paid if they get you the loan, so there is never any need for them to be paid anything up front.

High Service Fees

Even if there are no up-front fees, high fees can still be considered a scam. Some disreputable debt consolidation companies will charge a very high fee that is included in the loan. XXXXX For example, you need to borrow $30,000, and you end up with a loan for $50,000, with the $20,000 difference going to the debt consolidator as their fee. You end up with a loan much higher than you expected.

To avoid this scam, read the loan documents carefully before you sign anything, and don't agree to a loan that has very high fees.

Insurance Charges

Another very common tactic that is used by supposedly reputable finance companies is to add various insurance fees to your loan. They add various insurance fees including: " a life insurance fee (if you die the loan is paid off), " a disability insurance fee (if you become disabled the loan payments are made for you), " an unemployment insurance fee (if you are laid off or lose your job your loan payments are made until you return to work), and " a creditor insurance fee (to protect the lender if you don't pay).

If you want to buy insurance, call an insurance agent. If you buy insurance from your lender, it is not uncommon for the loan balance to be increased by 20% or more of the original loan amount. Don't fall for this scam. Decline the insurance they are offering, and if you need insurance, buy it yourself.

Debt Negotiation and Settlement Scams

There are some disreputable companies offering debt negotiation and debt settlement services. They promise to negotiate with your creditors, and work out payment arrangements with them.

There are reputable credit counselors providing this service, but there are also companies that promise to settle your debts for less than the full amount, which is a highly unlikely outcome.

Before you hire someone to negotiate on your behalf, ask them to describe exactly the service they will provide, and find out whether or not they are members of any professional association. All reputable credit counselors are members of a national association of credit counselors, and many are also members of the Better Business Bureau, so get references before you hire anyone to negotiate on your behalf. In most cases you can talk to your creditors with just as much success as a debt consolidator.

Converting Unsecured to Secured Debt

Secured debt, such as a home mortgage, will generally carry a lower interest rate than unsecured debt, such as a credit card, because the lender is protected; they can seize your house if you don't pay, so they are willing to charge a lower rate of interest. However, that advantage to the lender is a disadvantage to the borrower: if you don't make your payments, they will seize your house.

The scam here is that a lender convinces you to convert unsecured debt to secured debt without your knowledge. This is often done by having the debtor sign paperwork that has not been fully explained. One of the papers is a lien document, and later the debtor realizes they have a lien on their house.

High Interest Rates

The most common debt consolidation loan scam is high interest rates. If you have less than perfect credit, you will pay a higher interest rate than someone with perfect credit as a way of compensating the lender for their additional risk. However, that does not mean you should agree to a loan at excessive interest rates.

If you have credit cards at 19% interest rates, there is usually no point in consolidating with a 30% interest loan, but desperate people do it all the time, because they want one monthly payment. Unfortunately the price you pay for a high interest loan can be many more years worth of payments, which is of no value to you.

Debt consolidation loans are a great way to potentially reduce the interest you pay and combine all of your debts into one monthly payment, but do your own research and beware of the scams to make sure you, not just the lender or consolidator, benefit from your debt consolidation loan.