Money Fix: Debt consolidation loans
Sheryl Nance-Nash/Newsday (Long Island, NY)
25 March 2012

In an ideal world, a debt consolidation loan significantly lowers your monthly payment and controls your debt -- but it's not an ideal world.

New research from the National Endowment for Financial Education reveals that ads for these loans often don't give a full picture of the total costs, and they may make financial situations worse. For example, a five-year loan of $20,000 with a 10 percent interest rate would give you payments of about $425 monthly and you'd pay interest of $5,496. Extend the length to 15 years and your monthly payment is $215, but your interest increases to $18,685.

"We see people who took out consolidation loans to pay off debt, and once they did, they reverted back to using the cards that were paid off. Because of this, they doubled their debt," explains David Flores, a certified credit counselor with GreenPath Debt Solutions in Jericho.

If your one payment is still unaffordable, combining has no advantage. "Negotiate with a number of small creditors. They may take $300 on a $1,000 loan to be rid of it," says Andrew Thaler, an attorney with the law firm of Thaler Gertler in East Meadow.

Because debt consolidation loans can be tricky if you don't read the fine print and understand the fees, look elsewhere. Says MP Dunleavey of DailyWorth.com, "Go to a nonprofit credit counseling agency affiliated with the National Foundation for Credit Counseling, not some fly-by-night service you see on the bus or the Internet. They can help create a realistic payback plan."