For cash-strapped consumers, debt consolidation loans might seem like a quick fix to solve their money woes. Yet, new research supported by the National Endowment for Financial Education (NEFE) reveals ads for these loans do not give consumers a full picture of the total costs. 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.”
The NEFE website has an informative article that offers important details on debt consolidation loans and dispels many common consumer misconceptions.
For example, with such loans, 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. What many people do not realize, however, 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. In addition, consumers might be subjected to hidden fees and penalties, which many ads do not disclose.
Many consumers also mistakenly believe that lenders, often labeled as “credit counselors,” are obligated to give them the best rate for which they qualify, noted Lisa Bolton, Ph.D., an associate professor of marketing at Penn State University who led the NEFE research. “Lenders act in their own best interest, not the consumers. They’re trying to sell you a loan for the benefit of their institution, so you need to shop around.”
According to the research, the one-sided marketing of debt consolidation loans doesn’t just make the product look more favorable to consumers; it also could prompt people to continue with risky financial behaviors. 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.