February 6, Contact: The online poll, commissioned by NEFE and conducted by Harris Interactive in December among 2, adults ages 18 and older, demonstrates the overall debt burden people across the country are carrying1. And although some debt-laden Americans might continue with their current strategies to pay down debt in , 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.
We encourage consumers to enter any financial decision with their eyes wide open. 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. Lenders are not obligated to give you the best rate for which you qualify, so shop around and look carefully at the terms. Avoid the slippery slope. You will unnecessarily increase your monthly payment and boost your overall debt.
The best way to get out of debt is to create a financial plan and stick with it and to live within your means. With a debt consolidation loan, a consumer's multiple debts are combined into a single loan. Typically, these loans have a longer loan term, resulting in a lower monthly payment for the consumer. What many people do not realize is that the stretching out of the loan term leaves them with a greater overall debt burden, which must be endured for a longer time.
The advertising for this loan would not tell the consumer that he or she will be paying more than three times the interest, according to NEFE-funded research at Pennsylvania State University, the University of Florida and Duke University2. For example, if the loan is secured with collateral such as a home or other assets, they might incur up-front fees for appraisals, credit checks and attorney services.
If clients are late on payments, they may be charged late-payment penalties or suffer an increase in their interest rates. Some companies even charge consumers for applying. Many consumers mistakenly believe that lenders, often labeled as "credit counselors," are obligated to give them the best rate for which they qualify, says Lisa Bolton, Ph. For consumers feeling financially stressed, a debt consolidation loan may seem like a "get-out-of-jail-free" card, and it may lead them to continue to spend and borrow beyond their means.
Being exposed to that kind of message, you tend to relax and loosen the reins on your spending. What are the interest rate, term, monthly payments and total amount of interest paid?
What collateral is required for this loan? What fees or paperwork is required for the collateral? Is there a pre-payment penalty? How does your firm make money on this loan? To increase consumer understanding of debt consolidation loans, the researchers created their own ads and tested them with a commercial panel of college students and adult consumers.
The ads included information about how loans work and the relationship between annual percentage rate APR , loan lengths, monthly payments and total interest paid. They also provided consumers with information about lenders, including how and why lenders act the way they do, emphasizing that lenders are sellers who act in the best interest of the organization they represent.
After viewing explanatory information on loans and lenders, consumers in the study reported: Better intentions of engaging in positive money management, including being more likely to save, avoiding debt and budgeting their finances carefully A reduced likelihood of favoring or trying debt consolidation loans A better understanding of the importance of interest paid in loan decisions "This intervention helps people fully understand the importance of careful money management," says Bolton.
But it is important that consumers fully understand the consequences. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology including weighting variables , click here.
The researchers tested whether exposure to debt consolidation ads would make consumers less likely to manage their money carefully in the future.
They then tested whether full disclosure on debt consolidation loan terms and lenders would lead to more positive outcomes.
To learn more, click here.