Should You Get A Debt Consolidation Loan?
We’ve all had it or currently do have it.
Debt happens when we spend someone else’s cash instead of our own. This is either because we don’t want to spend our own and would rather use someone else’s, or because we don’t have cash of our own and have to use someone else’s
When we borrow, there is always going to be recourse in some form.
Recourse is the action the lender can take against a borrower who does not pay as agreed in order to attempt to recuperate the loaned funds. Recourse can also be used to penalize the borrower so they cannot easily get loans in the future.
What types of recourse are there?
- Collateral. A real asset that can be seized or taken away if the lender doesn’t pay back the borrower as agreed.
- Cash Flow. Free income the borrower earns and retains above and beyond their expenses that the lender can assume will service the debt and/or garnish in the event the borrower doesn’t pay as agreed.
- Creditworthiness. Literally the trustworthiness of the borrower based on their credit report. This shows the lender the borrower has kept their word with lenders in the past and also gives recourse that if the borrower does not pay back the lender, the lender can and will tarnish the financial reputation of the borrower by posting negative marks on their credit report. This is a form of social collateral where one’s literal reputation is backing up the debt.
We are going to focus on getting rid of #2 and #3 on this list. Because when someone borrows with collateral, such as a house or car, it usually is paid back as agreed and there is no easy way out aside from giving up the asset being collateralized.
When we borrow based on our cash flow or creditworthiness, this is called “un-secured”. Literally this means the debt is not tied to a real asset or thing (house, car, etc.).
Here’s the reality. Borrowing money only makes sense under the following circumstances:
- The loan is not being used for consumptive behavior.
- The loan pays for itself where the thing being purchased with the borrowed funds produces income that pays the loan down and off.
- An asset worth more than what is being borrowed is used as collateral so that if the loan agreement is broken, the lender goes after the asset and not the borrower.
- An exit strategy is in place before the loan is taken out.
- The borrower is financially literate and solvent.
When these 5 factors are not in place, I personally don’t think borrowing is a good idea.
When these 5 factors are not in place we have consumer loans (using money we don’t have to buy things we don’t need), late payments, default rates, paycheck to paycheck, bankruptcies and credit problems.
Unfortunately, the majority of America violates these 5 laws.
Most of our income goes to paying off debt.
We don’t save and therefore we don’t invest and never attain financial independence.
So if you’re reading this and have unsecured consumer debt (#2 and #3 from the list) you’ve probably looked at how you get rid of your debt, right?
One of the more popular options is a debt consolidation loan.
A consolidation loan is where 1 loan is taken out (backed by Cash Flow and/or Creditworthiness) where the annual rate is lower than the average rate of all of a person’s unsecured debt.
The consolidation loan is used to pay off all of the debt and the person now owes just one very large debt, with an interest rate lower than the average they used to pay.
At first glance, this sounds good! Less creditors involved and a lower overall interest rate, right?
But does this really solve the problem?
Let me put it this way. Does reducing the amount of interest I pay actually reduce my debt?
No, it doesn’t.
My owed balance (aka my principal) is still the same. I haven’t actually improved my situation at all, I’ve just lowered my interest rate. I still owe all of the money I borrowed plus interest.
So how do actually we get out of consumer debt?
Before I share with you how, I want to give you a few different ideas to think with.
The first idea is that a debt is actually an investment for the lender. When someone owes them money, that’s an investment. Other banks will actually buy your debt from the lender you borrowed from because they want the investment interest and income. So when you “pay off your debt” you are actually buying an investment away from the lender. You’re literally investing.
The second idea is that debt and dollars cancel each other out. When I mix $1 and $1 in debt, they both disappear forever. With consumer debt that’s a good thing because now the debt is gone and I have freed up the payment and I’m also saving in interest. But the downside is now my $1 is gone too. I’ll never see that dollar again. What if I’d invested it? There would have been a rate of return there and some profit. Paying off my debt with that $1 costs me that future rate of return and profit. This is called Opportunity Cost. It’s a real thing and it often costs more than the interest I pay on my debt.
When I’m paying off debt, I want to think like an investor and a bank, because I factually am investing and I’m dealing with banks. And I also want to avoid losing out on the future value of my dollars by spending them directly on debt.
So what do I do instead?
If you’re not familiar with my content, this next part will probably blow your mind.
Buy life insurance.
That’s right! Life insurance.
Not the kind your brother in law sells or that your friend from church keeps trying to recruit you into with their network marketing company.
There is only 1 very specific kind of life insurance that works for what I’m about to share with you and it is called High Early Cash Value Dividend Paying Whole Life Insurance.
I just call it The Sacred Account and you’re about to see why!
To learn all about it in full detail click here.
Otherwise I’m going to give you the crash course in the following steps.
- When I put $1 into this life insurance, that $1 grows at a 3–5% annual compounding rate.
- The funds in my life insurance are guaranteed against loss and guaranteed to grow.
- While that dollar grows at 3–5%, I can borrow against 70–90% of and still get the 3–5% growth on the entire amount.
- To borrow against my life insurance, it will cost me 1–3% in interest (and again, I still earn the 3–5% growth).
- This means when I borrow I am earning an average of 4% and paying an average of about 2% in interest. That’s a positive 2% profit to borrow my own funds.
- The cash I put in my life insurance is protected from Taxation, Creditors and Lawsuits. This part is important and you’re about to see why!
- The dollars I borrow will be used to pay off my debts, from smallest balance to largest balance.
- When a debt is paid off, I ALWAYS take the old payment and use it to pay back my life insurance loan (which is the same function as saving because when I pay myself back those funds go directly to my cash value and I can access them anytime I want)
Fast forward and here is the result of this strategy.
At the end of this I am:
- Debt free
- Saving more of my income than ever since my old payments now go into my life insurance
- All of the money that I used to pay off my debt was still growing this entire time so I have a chunk of cash sitting in my life insurance that I can use for reserves or investing now
- All of the money that I put in my life insurance will keep growing at a 3–5% rate forever.
If I did a consolidation loan, I probably still have debt and if I did pay it off, I’ve got nothing to show for it other than the debt being gone.
So the question becomes, would you rather only be debt free?
Or be debt free, plus still have all of the money you paid toward your debt, plus 3–5% annual interest on it all, for the rest of your life?
I chose #2 and I have so many clients who have done the same.
Here is a success story from one of my clients we helped with this who got debt free in less than 2 years!
If you’re reading this, you either have consumer debt or know someone that does.
You or that person are faced with the same choice I was faced with and that Jon was faced with.
That choice is to sacrifice or future financial freedom in exchange for the pursuit of debt freedom (using $1 to pay off $1 of debt and never seeing the future value of the $1 again)
Learning something new so that you can have both debt freedom now and financial freedom in the future.
To learn more about this method I want to invite you to watch this free 1 hour training to get all of the details!
Click here to watch!
Once you’re finished, I recommend you grab a copy of my book Blueprint To Financial Freedom so you can learn how to start doing this yourself and then connect with my team if you need any guidance.
To Purpose, Wealth & Freedom,
Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Yahoo Finance, Fox, Chicago Weekly News, New York Finance, interviewed on over 45 podcasts with world renowned experts, earning endorsements and affiliations throughout his career with names like Kevin O’Leary, Grant Cardone, Dave Ramsey, and Pamela Yellen.
Jerry’s mission in life is to help create millions of financially educated and solvent families achieving greater financial freedom and sharing the truth about money with those around them.
Learn more at www.WealthDynamX.com
(DISCLAIMER: The information in this content should not be considered tax, financial, investment, or any kind of professional advice. Only a professional diagnosis of your specific situation can determine which strategies are appropriate for your needs. Wealth DynamX can and does not provide advice unless/until engaged by you.)