Tiana Clewis: Have you gotten a phone call telling you that you can save money by consolidating your debts?
Did you believe them?
Debt consolidation is one of those "it sounds way too good to be true" type of recommendations that leaves you feeling downright confused.
Are they about to scam me out of my money?
Is this going to make my situation worse?
But they said they would save me money. Am I about to miss out on tons of savings if I say "No"?
The truth is it could be a scam, it could make your situation worse or if you don't take advantage, you could be missing out on tons of savings. What makes the difference is knowing how to protect yourself from making a bad deal that ends up costing you thousands of dollars in the long term.
So in part two of our debt consolidation saga, let's break down my six key recommendations for protecting yourself from an unprofitable debt consolidation loan.
Hey Dreamers! Welcome back to my channel, where we break down all things money, so it can stop being an obstacle and start acting like what it is: a tool to help you build a life that you truly find worth living.
Before we break down how to protect yourself during debt consolidation, let me introduce myself to the new folks in town.
I'm Tiana B. Clewis, an author, speaker, and coach who has dedicated her life to helping women entrepreneurs transform their relationship with money so they can grow their income, dump debt and start building the lifestyle they've been dreaming about... while still having some fun along the way.
Believe me when I say that you can actually eliminate your student loans and go to Vegas with the girls at the same time. I've done it and so have my clients.
If you want to join me on this journey, like this video and follow my channel by clicking that big red button below. Then hit the bell to make sure you're notified every time I drop brand new money tips and strategies that will help you hit your financial goals while still enjoying life.
One more thing before we dive into these recommendations. If you don't know what a debt consolidation loan is, stop what you're doing, right now, and check out last week's episode.
There are some things I'm gonna say today that's not going to make a lick of sense unless you already have a solid understanding of these loans. So if you aren't clear on what we're talking about, stop right now and go back. Check out last week's episode and then come back here.
As for the rest of you and those returning, let's get to it.
The first thing you should do to avoid getting into a bad debt consolidation deal is to never use a credit card for your consolidation.
I mean absolutely never!
I don't care if they're offering you a 0% APR for the first year. It's simply a ploy to get you to sign up for another credit card.
The truth is that you're probably not going to be off the loan in the first year, which means when you do start having interest charges it's going to be at the standard rate between 16 and 26%. And even if you've paid like half of the debt off, you're still going to pay a lot more money in the long run.
And what's worse is that these credit card companies know that's exactly what's going to happen to you. They know you're still going to have debt in year two, which is why they're perfectly happy to give you an interest-free introductory year, because in year two, they're still going to make money off of your debt.
So do not fall for the marketing ploy of 0% APR. The rate won't last forever and when you do have to start paying interest is going to be a lot. So yeah, that's just a losing situation.
My second recommendation is to never, ever, ever put your house at risk.
In my last episode, I talked at length about home equity lines of credit and HELOCs, so I'm not going to go into a bunch of details about those here. Well, what I am going to do is rehash the risks.
Since home equity loans and HELOCs use your house as collateral for the debt, should anything go wrong and you can't pay anymore, they can take your house. So instead of just worrying about the mortgage, now you have to worry about the debt consolidation loan as well.
That is way too much risk for my blood.
I believe that you should protect the roof over your head at all costs. As long as you have somewhere to lay your head, you can figure it out.
The water's off? We can work around it. Car got repoed? We can work around that too. But homelessness... oh, that's a total game changer. In fact, the cost of housing makes homelessness a really tough situation to get out of, especially if you're one of those people who maybe you moved away and you don't have your family as a safety net to help you.
And yeah, I know that there's a bunch of you out there who think that's never going to happen to me, but trust and believe when I tell you it happens. I've seen it. I've witnessed it with my own two eyes.
So just don't put yourself in that situation. Do not use a home equity loan and do not use a HELOC to consolidate your debt.
By the way, if you checked out my last episode, you're probably rolling your eyes right now because yes, I've already talked about this. But that should be a clue to you.
The fact that I made the last two things, like, points and both episodes should tell you how important it is that you never ever do these things. So no credit cards, no home equity loans, and definitely no HELOCs when you are trying to consolidate your debt.
My third recommendation is to make sure you shop around for interest rates. It can be really tempting to just call up the bank you're already using or to stick with the lender that made the call to you in the first place and offered you a debt consolidation loan.
But don't do that. Just shop around.
As I've mentioned before, I tend to find that credit unions and smaller regional banks tend to have better rates, but that's not a hard and fast rule by any means. So do your research.
Call up some local banks and see what their rates are averaging. Or maybe you can ask some family and friends who you know who may have consolidated in the past. You can check with your employer to see if they have any special offers or deals they've made with other lending institutions. You can even check with the bank that offers you a credit card to see what their rates are like on consolidation loans.
Then narrow your list down to about three or five that you're going to apply to. The reason why I want you to narrow it down to this point is because I want to be really careful about hard inquiries that will hit your credit report. Too many hard inquiries can actually drop your score because it mau look like you're struggling to repay the current debt, hence your need for more.
Now it's true that most credit card [score] algorithms can recognize when a person is shopping around, but hey, even that has limits. So you don't want to apply for like 10 loans and have each of those banks hitting your report with their hard inquiries.
So narrow it down. Once you get the loan offers back from each bank, see which one is giving you the better loan.
In fact, this ties nicely what my next bit of advice: when you're choosing the best loan offer for you, do not let a lender sell you purely based on a lower monthly payment because that monthly payment just may cost you more money in the long term.
One of the reasons why lenders will often lead the conversation with a lower monthly payment is because most people make financial decisions based on the monthly payment instead of the total cost of the item that they're buying or paying for.
Think about pretty much any car commercial that you've ever seen on TV. Most of the time, they will give you a line like "monthly payments starting at $399 for well qualified buyers." They'll even probably display the monthly payment in really big numbers on the screen while the total price of the car is usually in small numbers below, if it's on the screen at all.
You see the same thing with furniture companies, phone companies that want you to buy the latest iPhone - which I'm not doing - mattress stores, and even those as seen on TV ads will give you payments.
In many cases, they will never even tell you the total that you're going to pay, because ultimately, they know you're probably just going to look at the monthly payments and see if it'll fit into your budget.
Now they do the same thing when it comes to debt, consolidation loans. If you're paying $900 a month on your debt and they can get you down to about $650 a month, it's really easy for you to say, "Sign me up" and they know that fact. But when you factor in the interest rate and the term of the loan, i.e. how long you're going to be paying on it, it may cost you extra dollars over the life of the loan if you don't pay attention.
Before I made this video, I actually ran some financial scenarios and noticed that this was a big, major issue for people who were consolidating mostly student loans and personal loans.
One scenario that I did was based off the original debt profile of an old client. They were paying $837 a month on nearly $40,000 in debt. Of that, $30,000 was student loans. The debts had interest rates between 5% and 21% with their credit cards.
Now, if the person did a basic debt snowball, not adding any extra money, they would be... it would take them around four years and they will pay roughly $5,000 in total interest.
Well, when I did the math on a loan for the same amount at that 5% interest rate over six years, the monthly payment went down by roughly $200 a month. But they were going to pay a total of $6,400 in interest over the life of the loan. And that's, without me even considering the loan origination fees.
So even though the monthly payment went down, total interest went up by $1,400 and it was going to take an extra two years to pay off the debt. So when you take all of that into consideration - especially the fact that there are still going to be some loan origination fees, they're going to be added to it and increase that total - it's really easy to see why I'm telling you do not focus on the monthly payment.
Instead, I want you to focus on recommendation number five, which is to compare the total cost of the debt before consolidation and after.
If you watched my video on refinancing loans, you know where I'm going with this. When you refinance a loan or use debt consolidation, one of your primary goals is to save money over the life of your debt repayment.
So that means you need to know how much you'ld be paying an interest, if you paid off your debts on your own. You can do that pretty easily by downloading a debt snowball calculator, like the one I use in my scenarios from Vertex42.
Then you need to compare the total interest paid using the debt snowball to the total interest you would pay on the debt consolidation loan plus the origination fees.
If the loan origination fees plus interest paid on the new loan is less than the interest you would pay on the debt snowball, then hey, mission accomplished. Go for it. But if it's going to cost you more money, then you need to either keep shopping around or just scrap this entire debt consolidation idea and go back to your debt snowball.
My final recommendation is for you to consider the loan that gives you the best path to early repayment. Look, I don't care what the terms are on your loan, I am always going to encourage you to pay it off early.
In fact, every debt that I've had, I have paid off early. Whether I was putting extra on the monthly payments, paying a half of the monthly payment, biweekly - which means you always end up paying 13 payments instead of 12 - or saving money to pay off a large chunk, I was not paying any loan ever for the entire loan term that was set up. That's why I'm so adamant about this.
So I want you to check for anything like a prepayment penalty, cause you want to avoid those loans. And you want options to make principal only payments because you definitely don't want to be putting in any of your extra payments on the interest.
Also, if the new monthly consolidated payment is less than what you were paying before, how about you just go ahead and continue to pay the same amount? That extra $100, $200 that you're going to pay on the loan that you've been paying anyway, is going to help you pay off the debt faster. So yeah, you've already sped it up because it's going to be faster and cheaper with your debt consolidation. So why not speed it up even more by putting a little extra on the thing?
Okay, so we've kept ourselves away from getting into a bad debt consolidation loan that's going to cost us a bunch of extra money. Now the trick is to keep yourself from accumulating even more debt.
Remember when you get that debt consolidation loan, your total amount of debt hasn't gone down it's actually gone up a little because of loan origination fees. And since you have a lower monthly payment, a lot of people find themselves tempted to rack up even more debt by taking on other monthly obligations, like a couch, or using those newly cleared credit cards to buy more stuff.
So let's quickly visit four financial basics that you absolutely have to master, if you want to keep from adding even more debt to the list and canceling out every single benefit that you just gained from consolidating your debt.
Number one, close out any lines of credit that you've cleared with the debt consolidation loan. That means things like credit cards, HELOCs and other lines of credit there are now just sitting there with an empty balance calling your name. If you take the time to call the lender to close those accounts, you can't be tempted to use them. Duh.
Now they'll certainly try to talk you out of it. Trust me they will, but hold firm and do not end the call or leave that bank until that dag on account is closed.
Number two is to use a monthly budget to help you avoid overspending. Now if you've never created a budget or have found them difficult to do, just download my Beginner Budget Checklist. It'll show you step-by-step how to create a realistic budget that you can actually live with with and set financial priorities so that if something does happened, you know what to knock off instead of going into more debt.
You can head to tianabclewis.com/beginnerbudget to claim this free guide and make this step super easy.
Number three: you need to have an emergency fund of at least $1,000 set aside savings account so that you can tackle one off emergencies.
Yes, I know having cash sitting there doing nothing - like not to paying off your debts - is frustrating. But it's there to help you when something goes wrong. The average emergency takes less than $1,000 to handle, but if you don't have that $1,000, that emergency can easily derail whatever progress you're making right now.
So I want you to make sure you have it $1,000 emergency fund and when something unpleasant comes up and you use it, make sure that you put the money back so that it's always at $1,000.
Last, but not least, be sure to use sinking funds to help you plan for vacations, events and other big ticket purchases.
It's similar to an emergency fund, but it's a lot more fun. And if you do it right, and you can enjoy life, pay off your debt, and stop adding more debt all at the same time.
To learn all about sinking funds, you can check out episode 110 of the Dreamers Financial Playbook podcast or look for the video called "How to Use Sinking Funds to Avoid Debt and Go on Vacation" on my YouTube channel.
By the way, if you're using any of these techniques that I just went through to avoid taking on even more debt, let me know in the comments. I would absolutely love to celebrate you and your money smarts.
Whew Chile... okay. That took a lot of work to get through.
Do you now see why I had to turn this into a two part mini series? It was just way too much to cover and there are just so many things that can go wrong that I bet you, if I thought about it long enough, I can probably come up with more stuff and do a whole nother video but... okay, we're going to stop it here.
So just be careful when you're consolidating people.
Now that I've broken down the pros, cons and pitfalls of debt consolidation for you, let me know that you found this video useful by hitting that thumbs up below and subscribing to my channel. Don't forget, hit that bell so you're notified each week when I dropped brand new money tips and strategies to help you use your hard earned cash to dump debt, save money and start building your ideal life without sacrificing all things fun.
Finally, if you're looking for more information that will help you knock out your debts, even in the middle of a global pandemic and nationwide recession - it's a mess guys - these two videos are exactly what you need.
With that, you get to watching these videos and I'll see you next week. Bye bye.
Ever researched how to pay off debt fast and been told to use a credit card for debt consolidation. It sounds like just more credit card debt and it is! But if you understand what is debt consolidation and how debt consolidation works, you can easily get debt free while avoiding bad debt consolidation loans. No more student loans or credit card loans - just a soon-to-be debt free life. We’re walking through how to protect yourself from bad debt consolidation loans so you can pay off debt.
Ever tried to budget and felt like you didn’t know what the heck you were doing? Let’s make budgeting easy! Download my step-by-step Beginner Budget Checklist today at https://www.tianabclewis.com/beginnerbudget
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Today, we used the Debt Reduction Calculator from Vertex42 to calculate the total interest paid with the debt snowball in our scenario: https://www.vertex42.com/Calculators/debt-reduction-calculator.html
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