The Trouble With Debt Consolidation Loans

Research Reveals Ads Don’t Disclose Total Costs, Lead to Risky Behaviors


Date: February 6, 2012

Contact: Paul Golden 303-224-3514,

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.

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 carrying1. 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."

Details on Debt Consolidation

4 Tips for Understanding Debt Consolidation Loans

  • 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.
  • 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.
  • 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.
  • 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.

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.

For example, a five-year loan for $20,000 at a 10 percent interest rate would have a consumer paying about $425 monthly and owing total interest of $5,496. Extending the loan length to 15 years would knock down the monthly payment to $215, but it would increase the total interest to $18,685.

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.

"Typical ads tell consumers that the monthly payments will be low and that their debt will be reduced," says researcher Paul Bloom, Ph.D., an adjunct professor of social entrepreneurship and marketing at Duke University. "And although the ads sometimes tout lower interest rates, most people who need such loans don't qualify for the lower interest rate loans."

In addition, consumers might be subjected to hidden fees and penalties, which many ads do not disclose. 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.D., an associate professor of marketing at Penn State University who led the research.

"Lenders act in their own best interest, not the consumers,'" says Bolton. "They're trying to sell you a loan for the benefit of their institution, so you need to shop around."

The True Cost of Marketing

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.

"The marketing of debt consolidation loans makes people less likely to manage finances carefully," says Bolton. "These loans seem like a sure way to avoid being burdened with debt problems, showing that if you do run into trouble, you can get a debt consolidation loan. Being exposed to that kind of message, you tend to relax and loosen the reins on your spending."

In addition, knowing these loans are available may prevent consumers from taking steps to improve their financial situations, according to Joel Cohen, Ph.D., a distinguished service professor emeritus at the University of Florida, who also contributed to the research study.

"Believing that easy-to-get debt consolidation loans are easily and conveniently available can actually lead consumers to avoid taking actions needed to reduce debt, such as cutting back on credit card use and setting up a workable budget," says Cohen.

A Financial Literacy Intervention

5 Questions to Ask a Debt Consolidation Loan Lender

  • Is there a fee to apply for this loan?
  • 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. "In addition, it explains to consumers the downsides of debt consolidation loans and the importance of obtaining a low interest rate and reasonable term if you end up choosing to consolidate."

NEFE encourages consumers to take a similarly broad approach, evaluating their long-term debt situation instead of focusing only on their current circumstances, and understanding the terms of any debt management solution before signing an agreement.

"People who are burdened with debt need to carefully consider what is best for their financial situation," says Beck. "For some, debt consolidation loans may be a good option. But it is important that consumers fully understand the consequences."

For tips on getting out of debt, and finding additional income to pay down debt, visit

1) Harris Interactive Survey Methodology 

This survey was conducted online within the U.S. by Harris Interactive on behalf of NEFE from December 13-15, 2011, among 2,525 adults ages 18 and older. 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.

2) About the NEFE-Supported Research 

The research was conducted from 2008 to 2011 by researchers at Duke University, Pennsylvania State University and the University of Florida. 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.



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