Consolidated Debt Is Still Debt
African buffalos… considered the most dangerous animals in the bush – and often called “bank managers” – because when they stare at you with those soulless eyes it’s just like facing the bank manager to discuss your outstanding loans.
I’m sure you’ve heard and seen the adverts.
“Consolidate your debt and save yourself thousands in interest.”
“Consolidate your debt – your life will be so much easier with just one smaller payment to make each month – let us help you!”
“Let us make money off you” is more like it.
TRUTH BOMB!
Debt consolidation is dangerous.
Debt consolidation is nothing more than a “con” because you trick yourself into believing you’ve done something about your debt problem when all you’ve done is shuffle the deck chairs on your financial Titanic as it goes on sinking.
Debt consolidation is like decluttering and cleaning up your home by sweeping a whole pile of stuff under your bed and shoving it into cupboards. You’ve kidded yourself that you’ve sorted it out but the stuff is still there, clogging your space, sapping your energy, and draining money out of your life.
Seeing a nice clear space in your home you go off and get more stuff to fill it with!
If you try to clear your debt by falling for the debt consolidation hype you never deal with the root of the debt problem which is the spending habit that caused it in the first place. You don’t actually get rid of the debt because all you do is shove it into another financial cupboard!
❝ Insanity is defined as repeating the same
thing and expecting a different result ❞
➤ Expecting to get out of debt by borrowing is insane.
“If you find yourself in a hole – stop digging.”
You can’t get out of a debt hole by digging out the bottom. You have to stop the habits and behaviours that created the hole in the first place.
Effective debt help – ensuring you get out of debt, stay out of debt and start creating wealth is not quick or easy. But it is also not complicated. It absolutely can be done if you are prepared to deal with the habits and make changes in the way you treat money.
Debt consolidation statistics show that
over 75% of the time the debt grows back.
Why? Because the person hasn’t changed behaviour. Without a debt-busting plan – a plan to destroy the debt while at the same time changing money habits – paying cash, avoiding unnecessary expenditure – debt simply grows again.
People who do debt consolidation also learn nothing about their spend triggers and how money actually flows. They never learn how to manage the flow of money through their life so they have money saved for those to-be-expected “unexpected” events – life little emergencies, which all too often end up being paid for with debt. They never learn how to invest money so it starts working for them.
Debt consolidation is so appealing because there is often a lower interest rate on some of the debt and a lower combined repayment. However, in almost every case, we find that the lower repayment exists not because of the lower interest but because the repayment term has been extended.
When you truly understand the impact of compounding you know that this means you stay in debt longer and you pay more! No wonder banks and debt consolidation firms love this!
➤ Let’s look at some numbers
Say you have 45,000 in unsecured debt, including a three year loan of 15,000 at 14%, and a four-year loan of 30,000 at 10%.
Your monthly payment on the 15,000 loan is 512.66 and 760.88 on the 30,000 — a total of 1,274 per month.
At the end of the loan repayment periods you will have paid — just in interest — 3,456 + 6,522 = 9,978. That’s ten grand down the drain.
The debt consolidation company tells you, “Hooray! we’ve been able to lower your repayment to 724 per month and your interest rate to 9% by negotiating with your creditors and rolling the loans together into one.”
Sounds great, doesn’t it? Who wouldn’t want to pay 550 less per month in repayments?
But they don’t draw your attention to the fact that it will now take you seven years to pay off the loan.
Okay – but is that really so bad?
Damn right it’s bad!
Let’s look at the total cost of that debt as a result of the extra years of repayments and the extra years of paying interest.
You will now pay a total of 60,817 to settle the debt — vs. the 54,978 that the original loans were going to cost you. Even with the lower interest rate, your total will be 5,839 more. That’s the great deal you get with your “lower payment” – another six grand that comes out of your pocket.
Not such a good deal for you after all.
And remember, interest rates and payments are not some sort of game. When you add up the total cost of a loan, that cash is coming out of your money flow.
❝ You cannot get out of the debt habit
by repackaging loans and
fiddling with interest payments. ❞
You get out of debt by committing to a solid, robust and powerful debt destruction plan, by changing your money habits, by understanding the emotional triggers and factors which got you into debt (and keep you in debt).
➤ And then sticking to it.
You don’t have to go it alone. You can talk to us on our Facebook Community Page (it’s free to join) to get support and see how others are dealing with debt. We’d love to hear about your wins and your challenges.
Please don’t fall for the debt consolidation hype!
P.S. Have fun tracking your debt blitzing campaign with The Wealth Chef’s Debt Blitzing Tracker. It’s free!
