On the surface, a debt consolidation loan is a good strategy to become debt-free.
Many consumers are convinced they need debt consolidation loans to manage their debt loads.
People are hungry for debt consolidation loans. They beg and steal to get debt consolidation loans. What is the obsession with debt consolidation loans?
Many are failing with consolidating their debts and adding more debt every day.
Let’s shed some lights on why this a problem for many people!
What is a Debt Consolidation Loan?
“A Bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.” – Mark Twain
A debt consolidation loan is a refinancing process that allows the borrower to pay off existing debt by borrowing money from a new or existing lender. The new loan can be a secured or unsecured loan.
You know that no Bank will take the risk on extending your client a debt consolidation loan if they have too much debt and a challenged credit.
Let’s explore the advantages and disadvantages of debt consolidation loan as a debt consolidating strategy.
Advantages of Debt Consolidation Loan
A debt consolidation loan has many advantages:
- Debt consolidation loan comes with lower interest rate, especially if the loan is secured by a real estate property
- Reduces monies spent on interest
- Enables your client to have one low monthly payment, versus many
- Improves their monthly cash flow
Sounds great, doesn’t it?
Before you encourage your client to apply for a debt consolidation loan, let’s look at the disadvantages.
Disadvantages of Debt Consolidation Loans
- This list exposes few disadvantages of debt consolidation loans:
Consolidation loans are a bandage. This type of loan does not solve long-term financial problems
- The deadliest form of a debt consolidation loan is a private second mortgage. The interest rates and fees often exceed the current cost of servicing existing debts. In most situations, they make matters worse
- Debt consolidation loans make it easier to accumulate more debt. With more money, left over at the end of the month, many people start using their credit cards again and continue with poor spending habits
- Secured Debt consolidation loans convert unsecured short-term debt into secured long-term debt and disguise the cause of financial problems.
- Most people, who take these types of loans, end up owing more money over time and end up in a negative equity position with their home. That is especially true if the real estate market corrects negatively
- The second most deadly form of a debt consolidation loan is when the client finances its home and amortize the mortgage for thirty years or longer. The monthly payments are lower than the payments required to service the current debt load, but more interest is paid over the long-term
- Debt consolidation loans take longer to pay off
- Debt consolidation loans cost more in interest over the long term
Enough drama about debt consolidation loan and why this strategy is a perfect one.
I am not saying stop doing them or stop arranging mortgages and second mortgages to consolidate your clients’ debt load. I am saying there is a better way to help your client success with their debt consolidation loan.
Humor me for a minute, and keep reading!
Why Debt Consolidation Loans Fail
Debt Consolidation loans often fail because they don’t address the cause of your client’s debt. These loans simply reduce the negative symptoms caused by bad debt without actually treating the related causes such as poor money management skills, and the absence of a budget.
Generally speaking, many people who consolidate debt will manage to build a sizeable debt load within twelve to eighteen months after taking that debt consolidation loan. Often, ending up in the same financial situation as before.
Sounds familiar, doesn’t it?
How Can Your Clients Succeed With Their Debt Consolidation Loans?
Debt consolidation loans work well for individuals who stop relying on credit to pay their living expenses and embrace the concept of financial planning.
This is where you can make a difference in your clients’ lives.
Don’t give your clients debt consolidation loans without a comprehensive plan that ensure their success with their money.
Give your clients debt consolidation loans, but integrate these loans into overall financial plans that help your clients become debt-free in record time.
You can do this by using the ULTIMATE Money Coaching Software Platform. The Platform helps you create a comprehensive Financial Plan for your client. The Financial Plan maximizes your client’s chances to succeed with their debt consolidation effort.
- Define and fund their life goals and priorities
- Implement a spending plan/budget, fund their life goals and their costs of living and keep their eyes on their cash flow to keep it in line with their planned budget
- Track actual expenses and measure against estimated expenses to bring further balance to their cash flow
- Commit the savings to funding their Save-Me-From-Debt and 911 funds
- Commit to adding no new debt
- Debt consolidation loan is a product that fails many people
- A comprehensive financial plan that integrates the debt consolidation loan among other clients’ resources is a sure way to succeed with their debt consolidation efforts
Did you know the Money Coach Software Platform excels at implementing various debt consolidation strategies including the consolidation loans?