Tuesday, February 28, 2012

Debt Consolidation? Don't Go There

Nearly all Americans - 75 percent of us - have debt; and more than half of us worry about our loan balances, according to a new poll from the National Endowment for Financial Education (NEFE).

For cash-strapped consumers, debt consolidation loans might seem like a quick fix to solve money woes. But quick fixes are rarely that, and there's plenty of peril in these loans - and plenty of complications that aren't mentioned in their advertising campaigns.

New NEFE-supported research reveals that the ads for these loans do not give consumers a full picture of the total costs, and don't warn them that they can make their financial situations even worse. With a debt consolidation loan, a consumer’s multiple debts are combined into a single loan with a longer term, resulting in a lower monthly payment.

But stretching out a loan gives you a greater overall debt burden: A five-year loan for $20,000 at 10 percent interest would mean a $425 monthly payment and total interest of $5,496. Extending to 15 years would knock down the monthly payment to $215, but it would increase the total interest to $18,685 - quite a big difference!

Some debt-consolidation loans include hidden fees and penalties, including application fees. The worst part is that these loan packagers often label themselves "credit counselors" - so the borrower is lulled into thinking they are acting in his or her best interest, when actually the lending institution is selling the loan at the highest rate possible, for its own benefit.

Read more about the right ways to get out of debt and find additional income to pay down debt, at Smart About Money.

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