The pitfalls of debt consolidation loans

This post comes from Jeanine Skowronski at partner siteMainStreet.

Debt consolidation loans may seem like a great way to manage debt without taking the drastic step of declaring personal bankruptcy, but in many cases the too-good-to-be-true promise of significantly lower monthly payments is just that: an illusion.

New research from the National Endowment for Financial Education finds that these loans, which allow cash-strapped consumers to restructure multiple debts into low monthly payments, leave borrowers with greater overall debt burdens by stretching out the payments over longer periods.

For example, NEFE says, a five-year loan for $20,000 at a 10% interest rate would cost about $425 a month, and interest payments would total $5,496 for the life of the loan. Extending the debt to 15 years in a consolidation loan would knock down the monthly payment to $215, but it would increase the total interest payments to $18,685 -- a fact that is conveniently left out of most debt-consolidation advertisements. Post continues below.

"Typical ads tell consumers that the monthly payments will be low and that their debt will be reduced," researcher Paul Bloom said in an official statement. "And although the ads sometimes tout lower interest rates, most people who need such loans don't qualify for the lower interest rate loans."

NEFE says the loans also sometimes carry fees (for such things as credit checks and attorney services) and penalties (for late payments), which many ads do not disclose. Some companies even charge a fee just for applying for such a loan.

The discrepancies, often masked by advertising and labels such as "credit counselor," highlight the need for debt-ridden Americans to shop around before accepting a debt consolidation loan offer.

More on MainStreet and MSN Money:

• 4 simple steps to cutting credit card debt
• Meet the man with 50 credit cards
• The best credit union credit cards
• When debt settlement makes sense
• Should I consolidate my debt?
• Is credit counseling right for you?