Debt consolidation loans may seem like a great way to manage debt without taking the drastic step of declaring debt consolidation loans , 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  finds that these loans, which allow cash-strapped consumers to restructure multiple debts into low monthly payments from a reverse mortgage, 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  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 ,” highlight the need for debt-ridden Americans to shop around before accepting a debt consolidation loan offer.

Sainsbury’s Finance estimates that personal loans worth £1.5 billion will be taken out in the first three months of this year by consumers keen to consolidate their debts.

However, while M&S Loans is currently offering interest rates of just 6.0%, you can avoid interest charges altogether for almost two years with a 0% credit card. So which is the best option for you?

Debt Relief
The main advantage of consolidating your debts on to a balance transfer credit card, is that you can escape further interest charges for close to two years – as long as you have a good credit score and are happy to pay a hefty balance transfer fee.

The HSBC credit card, for example, currently offers HSBC current accounts customers an interest-free period of 23 months, but has a balance transfer fee of 3.3% and a standard rate of 17.9%.

Meanwhile, Barclaycard Platinum also offers a generous 22 months at 0%, but also has a fee of 2.9% and a standard rate of 17.9%.

If you think you can clear your balance within a shorter time, you may therefore be better off with a shorter 0% deal with a lower upfront fee.

Cards of this kind include the Virgin credit card, which offers nine months at 0% with a fee of just 1.5% and a standard rate of 16.8%, and another Barclaycard Platinum card at 16 months interest free with a fee of 1.6% and a standard rate of 18.9%.

Either way, should you fail to clear your balance in full within the interest-free period, you will need to switch to a new deal (and potentially pay another balance transfer fee) to avoid incurring huge interest charges.

Debt Consolidation
By using a credit card to consolidate your debts, you also risk being tempted to reduce your monthly payments to free up some extra cash – meaning that you pay your debts off more slowly – or even to continue spending.

he problem with debt consolidation loans is that there are some really shady companies out there, posing as non-profits.

Many are honest, but not all.

To play it safe before you go with a loan company, I suggest you talk to somebody at a credit union.

Credit unions tend to be smaller than banks, and are often more willing to help people both with perfect—and less-than-perfect credit histories. They could give you some options for consolidating that debt.

Another idea for you is using the “debt snowball” approach.

That’s where you list debts from smallest to largest, and pay the minimum payment on all the debts except the smallest.

Pay that one off first.

Then take the minimum payment on the next smallest debt, plus what you would have paid towards the one you just paid off—and put that toward the debt you’re tackling next!

Then you continue until you’ve paid off all three cards.

Now, if you’re falling behind on your payments and you’re racking up late fees and high interest rates, you should find a good counselor at a reputable non-profit agency. To find an agency, visit the National Foundation for Consumer Credit Counseling here

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