THE TROUBLE WITH DEBT CONSOLIDATION LOANS Research Reveals Ads Don't Disclose Total Costs, Lead to Risky Behaviors

 TROUBLE WITH DEBT CONSOLIDATION LOANS Research Reveals Ads Don't Disclose Total Costs, Lead to Risky Behaviors

Contact: Paul Golden 303-224-3514, pdg@nefe.org

DENVER—Seventy-five percent of Americans have debt, and 51 percent are worried about the balance they owe, finds a new poll from the National Endowment for Financial Education (NEFE). The online poll, commissioned by NEFE and conducted by Harris Interactive in December 2011 among 2,525 adults ages 18 and older, demonstrates the overall debt burden people across the country are carrying(1). And although some debt-laden Americans might continue with their current strategies to pay down debt in 2012, others may be feeling the crush of holiday credit card statements and multiple debts or struggling to keep up with their current monthly loan payments.

For cash-strapped consumers, debt consolidation loans might seem like a quick fix to solve their money woes. But they will want to tread carefully, as new NEFE-supported research reveals ads for these loans do not give consumers a full picture of the total costs, and furthermore, these loans may cause consumers to make their financial situations even worse.

“The advertising for debt consolidation loans often fails to mention the downsides of these types of loans,” says Ted Beck, president and CEO of NEFE. “In presenting debt consolidation as an option, much of the focus is placed on the ‘lower’ amount of monthly payments, without regard to impacts like total interest paid. We encourage consumers to enter any financial decision with their eyes wide open.”  Read the full report here

About the National Endowment for Financial Education (NEFE) NEFE is a nonprofit foundation that inspires empowered financial decision making for individuals and families through every stage of life. For more information, visit www.nefe.org

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 4 Tips for Understanding Debt Consolidation Loans

1. Weigh the downsides. Longer loan terms may decrease your monthly payments, but they increase the total amount of interest you will pay over the life of the loan. In addition, you might incur hidden fees and penalties.

2. Know the seller. Lenders are not obligated to give you the best rate for which you qualify, so shop around and look carefully at the terms. Also, just because he or she is willing to sell you a loan doesn’t mean you can afford it.

3. Avoid the slippery slope. Don’t fall into the trap of increasing the amount of a debt consolidation loan to finance additional purchases. You will unnecessarily increase your monthly payment and boost your overall debt.

4. Establish a plan. The best way to get out of debt is to create a financial plan and stick with it and to live within your means.

 5 Questions to Ask a Debt Consolidation Loan Lender

1. Is there a fee to apply for this loan?

2. What are the interest rate, term, monthly payments and total amount of interest paid?

3. What collateral is required for this loan? What fees or paperwork is required for the collateral?

4. Is there a pre-payment penalty?

5. How does your firm make money on this loan? 

Courtesy of National Endowment for Financial Education (NEFE)