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Should I Consolidate My Debt? Avoiding Bad Debt Consolidation Loans - YouTube
Channel: Tiana B. Clewis
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Have you gotten a phone call
telling you that you can save
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money by consolidating your debts?
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Did you believe them?
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Debt consolidation is one of those
"it sounds way too good to be true"
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type of recommendations that leaves
you feeling downright confused.
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Are they about to scam me out of my money?
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Is this going to make my situation worse?
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But they said they would save me money.
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Am I about to miss out on
tons of savings if I say "No"?
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The truth is it could be a scam, it
could make your situation worse or if
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you don't take advantage, you could
be missing out on tons of savings.
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What makes the difference is knowing
how to protect yourself from making
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a bad deal that ends up costing you
thousands of dollars in the long term.
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So in part two of our debt
consolidation saga, let's break
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down my six key recommendations
for protecting yourself from an
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unprofitable debt consolidation loan.
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Hey Dreamers!
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Welcome back to my channel, where we
break down all things money, so it can
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stop being an obstacle and start acting
like what it is: a tool to help you build
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a life that you truly find worth living.
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Before we break down how to protect
yourself during debt consolidation, let me
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introduce myself to the new folks in town.
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I'm Tiana B.
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Clewis, an author, speaker, and coach who
has dedicated her life to helping women
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entrepreneurs transform their relationship
with money so they can grow their
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income, dump debt and start building the
lifestyle they've been dreaming about...
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while still having some fun along the way.
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Believe me when I say that you
can actually eliminate your
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student loans and go to Vegas
with the girls at the same time.
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I've done it and so have my clients.
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If you want to join me on this journey,
like this video and follow my channel
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by clicking that big red button below.
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Then hit the bell to make sure you're
notified every time I drop brand
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new money tips and strategies that
will help you hit your financial
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goals while still enjoying life.
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One more thing before we dive
into these recommendations.
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If you don't know what a debt
consolidation loan is, stop what
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you're doing, right now, and
check out last week's episode.
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There are some things I'm gonna say
today that's not going to make a lick
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of sense unless you already have a
solid understanding of these loans.
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So if you aren't clear on what we're
talking about, stop right now and go back.
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Check out last week's episode
and then come back here.
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As for the rest of you and those
returning, let's get to it.
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The first thing you should do
to avoid getting into a bad debt
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consolidation deal is to never use a
credit card for your consolidation.
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I mean absolutely never!
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I don't care if they're offering
you a 0% APR for the first year.
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It's simply a ploy to get you to
sign up for another credit card.
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The truth is that you're probably not
going to be off the loan in the first
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year, which means when you do start
having interest charges it's going to be
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at the standard rate between 16 and 26%.
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And even if you've paid like half of
the debt off, you're still going to
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pay a lot more money in the long run.
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And what's worse is that these credit
card companies know that's exactly
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what's going to happen to you.
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They know you're still going to
have debt in year two, which is why
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they're perfectly happy to give you
a interest free introductory year,
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because in year two, they're still
going to make money off of your debt.
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So do not fall for the
marketing ploy of 0% APR.
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The rate won't last forever and
when you do have to start paying
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interest is going to be a lot.
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So yeah, that's just a losing situation.
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My second recommendation is to never,
ever, ever put your house at risk.
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In my last episode, I talked at length
about home equity lines of credit and
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HELOCs, so I'm not going to go into
a bunch of details about those here.
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Well, what I am going to
do is rehash the risks.
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Since home equity loans and HELOCs use
your house as collateral for the debt,
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should anything go wrong and you can't
pay anymore, they can take your house.
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So instead of just worrying about the
mortgage, now you have to worry about
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the debt consolidation loan as well.
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That is way too much risk for my blood.
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I believe that you should protect
the roof over your head at all costs.
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As long as you have somewhere to lay
your head, you can figure it out.
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The water's off?
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We can work around it.
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Car got repoed?
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We can work around that too.
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But homelessness...
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oh, that's a total game changer.
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In fact, the cost of housing makes
homelessness a really tough situation
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to get out of, especially if you're
one of those people who maybe you
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moved away and you don't have your
family as a safety net to help you.
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And yeah, I know that there's a bunch
of you out there who think that's never
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going to happen to me, but trust and
believe when I tell you it happens.
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I've seen it.
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I've witnessed it with my own two eyes.
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So just don't put yourself
in that situation.
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Do not use a home equity loan and do not
use a HELOC to consolidate your debt.
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By the way, if you checked out my
last episode, you're probably rolling
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your eyes right now because yes,
I've already talked about this.
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But that should be a clue to you.
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The fact that I made the last two
things, like, points and both episodes
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should tell you how important it is
that you never ever do these things.
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So no credit cards, no home equity
loans, and definitely no HELOCs when
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you are trying to consolidate your debt.
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My third recommendation is to make sure
you shop around for interest rates.
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It can be really tempting to just call
up the bank you're already using or
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to stick with the lender that made
the call to you in the first place and
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offered you a debt consolidation loan.
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But don't do that.
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Just shop around.
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As I've mentioned before, I tend
to find that credit unions and
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smaller regional banks tend to
have better rates, but that's not
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a hard and fast rule by any means.
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So do your research.
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Call up some local banks and see
what their rates are averaging.
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Or maybe you can ask some family
and friends who you know who may
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have consolidated in the past.
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You can check with your employer
to see if they have any special
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offers or deals they've made
with other lending institutions.
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You can even check with the bank that
offers you a credit card to see what their
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rates are like on consolidation loans.
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Then narrow your list down to about three
or five that you're going to apply to.
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The reason why I want you to narrow it
down to this point is because I want to
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be really careful about hard inquiries
that will hit your credit report.
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Too many hard inquiries can actually
drop your score because it mau look
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like you're struggling to repay the
current debt, hence your need for more.
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Now it's true that most credit card
[score] algorithms can recognize
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when a person is shopping around,
but hey, even that has limits.
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So you don't want to apply for like 10
loans and have each of those banks hitting
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your report with their hard inquiries.
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So narrow it down.
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Once you get the loan offers back
from each bank, see which one
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is giving you the better loan.
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In fact, this ties nicely what my next bit
of advice: when you're choosing the best
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loan offer for you, do not let a lender
sell you purely based on a lower monthly
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payment because that monthly payment just
may cost you more money in the long term.
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One of the reasons why lenders will often
lead the conversation with a lower monthly
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payment is because most people make
financial decisions based on the monthly
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payment instead of the total cost of the
item that they're buying or paying for.
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Think about pretty much any car
commercial that you've ever seen on TV.
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Most of the time, they will give you
a line like "monthly payments starting
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at $399 for well qualified buyers."
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They'll even probably display the
monthly payment in really big numbers
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on the screen while the total price
of the car is usually in small numbers
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below, if it's on the screen at all.
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You see the same thing with furniture
companies, phone companies that want you
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to buy the latest iPhone - which I'm not
doing - mattress stores, and even those
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as seen on TV ads will give you payments.
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In many cases, they will never even
tell you the total that you're going
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to pay, because ultimately, they
know you're probably just going to
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look at the monthly payments and
see if it'll fit into your budget.
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Now they do the same thing when it
comes to debt, consolidation loans.
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If you're paying $900 a month on your
debt and they can get you down to about
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$650 a month, it's really easy for you to
say, "Sign me up" and they know that fact.
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But when you factor in the interest
rate and the term of the loan, i.e.
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how long you're going to be paying
on it, it may cost you extra
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dollars over the life of the
loan if you don't pay attention.
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Before I made this video, I actually
ran some financial scenarios and noticed
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that this was a big, major issue for
people who were consolidating mostly
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student loans and personal loans.
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One scenario that I did was based off the
original debt profile of an old client.
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They were paying $837 a month
on nearly $40,000 in debt.
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Of that, $30,000 was student loans.
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The debts had interest rates between
5% and 21% with their credit cards.
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Now, if the person did a basic
debt snowball, not adding any
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extra money, they would be...
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it would take them around four
years and they will pay roughly
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$5,000 in total interest.
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Well, when I did the math on a loan
for the same amount at that 5% interest
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rate over six years, the monthly payment
went down by roughly $200 a month.
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But they were going to pay a
total of $6,400 in interest
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over the life of the loan.
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And that's, without me even
considering the loan origination fees.
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So even though the monthly payment
went down, total interest went up by
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$1,400 and it was going to take an
extra two years to pay off the debt.
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So when you take all of that into
consideration - especially the fact
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that there are still going to be some
loan origination fees, they're going to
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be added to it and increase that total
- it's really easy to see why I'm telling
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you do not focus on the monthly payment.
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Instead, I want you to focus on
recommendation number five, which
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is to compare the total cost of the
debt before consolidation and after.
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If you watched my video on refinancing
loans, you know where I'm going with this.
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When you refinance a loan or use
debt consolidation, one of your
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primary goals is to save money over
the life of your debt repayment.
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So that means you need to know how
much you'ld be paying an interest, if
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you paid off your debts on your own.
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You can do that pretty easily
by downloading a debt snowball
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calculator, like the one I use
in my scenarios from Vertex42.
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Then you need to compare the
total interest paid using the debt
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snowball to the total interest you
would pay on the debt consolidation
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loan plus the origination fees.
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If the loan origination fees plus interest
paid on the new loan is less than the
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interest you would pay on the debt
snowball, then hey, mission accomplished.
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Go for it.
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But if it's going to cost you more
money, then you need to either
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keep shopping around or just scrap
this entire debt consolidation idea
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and go back to your debt snowball.
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My final recommendation is for you
to consider the loan that gives you
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the best path to early repayment.
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Look, I don't care what the terms are
on your loan, I am always going to
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encourage you to pay it off early.
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In fact, every debt that I've
had, I have paid off early.
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Whether I was putting extra on the monthly
payments, paying a half of the monthly
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payment, biweekly - which means you always
end up paying 13 payments instead of
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12 - or saving money to pay off a large
chunk, I was not paying any loan ever
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for the entire loan term that was set up.
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That's why I'm so adamant about this.
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So I want you to check for anything
like a prepayment penalty, cause
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you want to avoid those loans.
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And you want options to make principal
only payments because you definitely
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don't want to be putting in any of
your extra payments on the interest.
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Also, if the new monthly consolidated
payment is less than what you were paying
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before, how about you just go ahead
and continue to pay the same amount?
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That extra $100, $200 that you're
going to pay on the loan that you've
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been paying anyway, is going to
help you pay off the debt faster.
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So yeah, you've already sped it up
because it's going to be faster and
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cheaper with your debt consolidation.
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So why not speed it up even more by
putting a little extra on the thing?
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Okay, so we've kept ourselves
away from getting into a bad debt
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consolidation loan that's going
to cost us a bunch of extra money.
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Now the trick is to keep yourself
from accumulating even more debt.
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Remember when you get that debt
consolidation loan, your total
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amount of debt hasn't gone down
it's actually gone up a little
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because of loan origination fees.
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And since you have a lower monthly
payment, a lot of people find themselves
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tempted to rack up even more debt by
taking on other monthly obligations,
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like a couch, or using those newly
cleared credit cards to buy more stuff.
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So let's quickly visit four financial
basics that you absolutely have to
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master, if you want to keep from adding
even more debt to the list and canceling
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out every single benefit that you just
gained from consolidating your debt.
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Number one, close out any lines
of credit that you've cleared
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with the debt consolidation loan.
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That means things like credit cards,
HELOCs and other lines of credit
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there are now just sitting there with
an empty balance calling your name.
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If you take the time to call the
lender to close those accounts,
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you can't be tempted to use them.
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Duh.
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Now they'll certainly try
to talk you out of it.
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Trust me they will, but hold firm and
do not end the call or leave that bank
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until that dag on account is closed.
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Number two is to use a monthly budget
to help you avoid overspending.
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Now if you've never created a budget or
have found them difficult to do, just
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download my Beginner Budget Checklist.
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It'll show you step-by-step how to
create a realistic budget that you
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can actually live with with and set
financial priorities so that if something
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does happened, you know what to knock
off instead of going into more debt.
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You can head to
tianabclewis.com/beginnerbudget
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to claim this free guide and
make this step super easy.
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Number three: you need to have an
emergency fund of at least $1,000
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set aside savings account so that
you can tackle one off emergencies.
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Yes, I know having cash sitting there
doing nothing - like not to paying
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off your debts - is frustrating.
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But it's there to help you
when something goes wrong.
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The average emergency takes less
than $1,000 to handle, but if
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you don't have that $1,000, that
emergency can easily derail whatever
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progress you're making right now.
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So I want you to make sure you have
it $1,000 emergency fund and when
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something unpleasant comes up and you
use it, make sure that you put the money
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back so that it's always at $1,000.
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Last, but not least, be sure
to use sinking funds to help
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you plan for vacations, events
and other big ticket purchases.
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It's similar to an emergency
fund, but it's a lot more fun.
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And if you do it right, and you can
enjoy life, pay off your debt, and stop
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adding more debt all at the same time.
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To learn all about sinking funds,
you can check out episode 110 of the
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Dreamers Financial Playbook podcast
or look for the video called "How to
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Use Sinking Funds to Avoid Debt and
Go on Vacation" on my YouTube channel.
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By the way, if you're using any of
these techniques that I just went
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through to avoid taking on even more
debt, let me know in the comments.
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I would absolutely love to
celebrate you and your money smarts.
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Whew Chile...
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okay.
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That took a lot of work to get through.
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Do you now see why I had to turn
this into a two part mini series?
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It was just way too much to cover
and there are just so many things
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that can go wrong that I bet you,
if I thought about it long enough, I
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can probably come up with more stuff
and do a whole nother video but...
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okay, we're going to stop it here.
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So just be careful when
you're consolidating people.
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Now that I've broken down the pros, cons
and pitfalls of debt consolidation for
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you, let me know that you found this
video useful by hitting that thumbs up
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bwloe and subscribing to my channel.
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Don't forget, hit that bell so you're
notified each week when I dropped brand
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new money tips and strategies to help you
use your hard earned cash to dump debt,
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save money and start building your ideal
life without sacrificing all things fun.
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Finally, if you're looking for more
information that will help you knock
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out your debts, even in the middle
of a global pandemic and nationwide
[924]
recession - it's a mess guys - these
two videos are exactly what you need.
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With that, you get to watching these
videos and I'll see you next week.
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Bye bye.
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