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Zero percent finance loans -- risk or reward?

Americans fall into debt crisis for many reasons: loss of job, taxes, divorce or death of a spouse, a spouse's poor spending habits or simply overspending, but medical bills are one of the leading culprits.

More than 60 percent of people ages 19 to 64 with a negative debt-to-income ratio (also known as DTI ratio) were put in that situation due to medical expenses.

The rising cost of health-care, coupled with inflation and employers who look to reduce their portions of insurance premiums, has burdened many consumers both with and without health insurance. More and more people are turning to their credit cards to pay their medical bills.

According to one survey, "one-quarter of Americans have problems paying medical bills and two-thirds of these people have health insurance." (Reported in the article "More Americans Paying Their Medical Bills with Credit Cards," by Amanda Gardner, January 2007, www.healthfinder.gov).

Now financing medical procedures has gone the way of car dealers and mattress manufacturers who offer one (or more) years of interest-free payments, according to an article published this past August in The New York Times. Zero-interest financing is now being offered by doctors and dentists offices, but be cautious about this "no interest" loan and think very carefully about financing any medical procedure.

The old proverbs "nothing is ever free" and "read everything before you sign" are to be heeded when considering these offers. Many of these loan offers come with a default rate listed as "other ARPs" on the credit application. A default rate is the APR you will pay should you be late or miss even one payment.

If the procedure is not medically necessary, consider what it will really cost you. A zero-interest loan could skyrocket to a default rate of 18 percent to 29.99 percent and could create this scenario: You take out a $6,000 loan for a procedure at zero percent interest for 36 months with a monthly payment of roughly $166. After six months of steady payments you miss one payment. Now that zero percent interest rate jumps to an 18 percent APR. To calculate how much this loan will now cost: divide 18 (percentage rate) by 12 (months), which equals 1.5 percent x $5,004 (the balance of the financing), bringing the final payment to a whopping $7,506, which doesn't include the $996 you already paid. Now that $6,000 procedure has cost you roughly $8,500. If you have necessary medical expenses, such as an emergency surgery or treatment for illness, despite the doctor accepting and/or suggesting you use your credit cards for payment, it is best to make an affordable down payment and set up a payment plan. These payment plans generally have no interest for the life of the balance, unless unpaid and allowed to go into collections. Doctors and hospitals alike are required to accept whatever monthly payment you can afford and must keep your account in good standing no matter how long it takes to pay off the balance. It is never advised to convert any unsecured debt (such as doctors' bills) into a secured debt, for example, taking out a second mortgage or using a home equity loan to pay for the medical bills. For non-essential, but highly desirable procedures such as laser eye surgery or breast augmentation, it is best to save up and pay in full at the time of the procedure.

If you have fallen victim to these financing offers and find yourself struggling to make the payments each month, contact your creditor to let them know about your situation before you miss payments. Let the creditor know you wish to set up a payment plan at a reduced interest rate that will allow you to remain steady with your payments, and in exchange for this, you are willing to close the account and will pay the new amount each month on time without fail. If you have been late or missed payments, you may still have some options, but may need to seek the advice from a debt management agency to assist you with getting your debt under control.

Enlisting the help of a professional credit counselor is good start; initial counseling sessions are at no charge. An agency educates and counsels consumers on how to properly plan and use budgets, pay down debt and avoid the misuse of credit.

These agencies also offer other services such as a debt management program (DMP), which is a payment plan where consumers can combine their monthly payments into one single payment to be distributed to their creditors by that agency. Upon enrollment in a DMP, the agency you are working with will provide you with a financial analysis (usually at a small set fee) to determine an affordable monthly payment and schedule, then the agency will contact each of your creditors on your behalf to request benefits such as a reduced interest rate, the elimination of over-the-limit and late fees, and to set up a new due date for your payment.

Avoid advertisements and agencies who promise to "cut your debt in half" or offer "debt settlements" when you are researching an agency.

Pace is the director of education for Debt-Free America a 501(c)(3) nonprofit, community service organization offering confidential credit counseling, debt management program options and financial literacy education to consumers of all ages and income levels nationwide.

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