debt problems

A CONsolidation Loan Story

by mike on February 27, 2010

The most asked question I get from clients and potential clients is about debt consolidation loans.  Many people see it as a way to solve their debt problems.  After all, why pay 15 different payments at high interest when we can consolidate them into a consolidation loan as a second mortgage which will reduce the payments and the interest?  Mathematically, it makes sense.  The problem is if we were doing math, we wouldn’t get into debt in the first place.  Personal finance is all about behavior and habits.  We are going to look at a fictional story about a couple, Bill and Susie, to illustrate what typically happens when we just address the symptoms, not the root of the problem.

Bill and Susie both came from middle class families.  They both got allowances as kids (doing some chores to earn them or course) and as they got older they worked in the summer for extra money.  They used the extra money to buy CDs (compact discs, that is, not the investments from a bank), nice clothes, go to concerts, and eat a lot of Taco Bell and McDonalds.  They got to use the family cars after they got their license and eventually were given a car as a graduation gift.  In other words, they were very much used to a certain lifestyle.

Once Bill and Susie got married right after college, they immediately wanted to duplicate the lifestyle their parents’ had.  They failed to realize it took their parents decades to reach that middle class lifestyle.  But keep in mind, for the last decade or so Bill and Susie were used to living in a nice house, driving a nice vehicle, wearing nice clothes and enjoying fun entertainment experiences.  They decided to rent an apartment when first married, but it took less than six months for them to start complaining about apartment life.  They didn’t have a garage to put the vehicles in which meant scraping windows in the winter and then the four college guys moved in next door and blasted music until all hours of the night.  That was all they could take, so they started looking at houses.

Bill and Susie made the mistake most young couples make and they first looked at four bedroom, two-bath houses (similar to the ones they grew up in). After seeing these houses, they never would have settled for a two bedroom, one bath house.  Plus, the few smaller houses they looked at were not in a very nice neighborhood.  So, even though they knew the house they wanted was out of their price range, their parents encouraged them to stay in the nice neighborhoods.

The problem was they couldn’t qualify for the $150,000 mortgage to buy the house.  So, each set of parents loaned them $15,000 as a down payment and they qualified for the $120,000 mortgage.  The mortgage payment, payments back to their parents, insurance, and taxes added up to about 50% of their income.  Each month they were struggling to make those payments, plus their other regular expenses including student loan payments and essentials.  Some of their essentials started getting put on credit cards, including one card that they had already put $4,000 on for their honeymoon.  After about a year, they found themselves deeply in debt.  Bill’s car he had since graduation kept breaking down, so they decided they had to get a better car, which added a $300 a month car payment.

They got pregnant during all of this and were hoping Susie could stay home.  But, there was no way they could swing that with all of these payments.  Soon, after day care expenses, eating out more, work clothes, and another car payment, her entire salary was being consumed and they were deeper in debt than ever before.  Looking for a way to get out of this mess, Bill decided that a debt consolidation loan was the best way to get out.  They got a second mortgage on their home and it decreased their overall debt payments from $1,500 a month to $900.  With the pressure of $600 less a month to pay, they thought their problems were solved.  Not so, however.  They fell right back into the same spending habits and within a year had several little bills PLUS the debt consolidation loan.  They even fell behind on their mortgage.

Soon, Susie and Bill were arguing constantly, and not even just about money.  Bill was working 80 hours a week, so they spent no time together.  She was receiving calls from the collectors five to ten times a day.  They would yell at her and call her names.  The worse day was when they received a foreclosure notice in the mail.  All of this added stress to the marriage that they had never imagined.

Unfortunately, many married couples find themselves in this situation.  Sadly, it often leads to divorce.  The point of the story is that they continued to only address the symptoms to their problem.  The root of their problem was overspending and living a lifestyle, although not extravagant, was above their means.  Many times along the way they could have made a decision to stop the madness and fix the problem once and for all.  Instead, they continued to put out fires with the culmination being the debt consolidation loan.  It gave them a false sense of security that they had solved their problems.  All they did was move some money around, they did not change their behavior or habits.

This is exactly why debt consolidation loans are not a good idea.  If you are currently in a financial crisis, please take the moral of this story to heart, and choose today to fix the ROOT of the problem.  You will soon find your way on the right path and you will have control over the situation.  That will relieve stress and unity and harmony can once again enter your marriage.

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