Episode 212 - Why Debt Consolidation Doesn't Actually Work

A common solution that people turn to when dealing with overwhelming debt is debt consolidation. It promises the convenience of combining multiple debts into one, supposedly making it easier to manage and pay off. However, the reality is far from what is advertised. In this blog post, we will explore debt consolidation and  why it may not be the best solution for everyone.

The Illusion of Debt Consolidation:

Contrary to popular belief, debt consolidation is not the magic bullet it is made out to be. Ryan co- host of the Debt Free Dad podcast, shares his journey of paying off over $160,000 in debt and how he once believed that debt consolidation was the answer to his financial woes. In his quest to become debt-free, Ryan tried various consolidation methods, including home equity loans, balance transfers, and even borrowing from his retirement account. Each time, the initial sense of accomplishment quickly faded as old spending habits resurfaced.

The Cycle of False Relief:

Debt consolidation gives relief by reducing monthly payments. However, this newfound financial breathing room can lead you  down a dangerous path. Instead of using the extra money to pay off their debts, they succumbed to the temptation of indulging in material possessions they had previously denied themselves. Furniture, cars, toys for the kids, and other unnecessary expenses became the norm once again.

The Band-Aid Effect:

One of the most critical lessons Ryan learned is that debt consolidation merely acts as a band-aid for deeper financial issues. It does not address the root causes of debt, which often lie in our behaviors and relationship with money. By consolidating their debts, Ryan and his family could avoid confronting their spending habits and taking a hard look at the real problem: themselves. The illusion of progress masked their inability to adopt healthier financial behaviors.

The Need for Behavioral Change:

Ryan emphasizes that fixing our financial behaviors should be the priority before considering debt consolidation. Consolidation can only be effective when accompanied by a genuine commitment to change. Only when Ryan and his family underwent a fundamental shift in their financial mindset and behavior were they able to successfully consolidate their debts and emerge from the cycle of accumulating more.

Looking Beyond the Quick Fix:

While debt consolidation can be a viable solution for some individuals, it is crucial to remember that it is not a one-size-fits-all remedy. Without addressing the underlying behavioral issues and committing to long-term change, debt consolidation can lead to a false sense of security and deeper debt down the road. Ryan's journey is a testament to the importance of facing our financial realities head-on and making thoughtful decisions that address the underlying causes of our debt.

Conclusion:

Debt consolidation, though marketed as an easy fix, is often far from it. Ryan Nelson's experience serves as a cautionary tale for those considering this approach without first addressing their financial behaviors. True financial freedom can only be achieved through self-reflection, behavioral change, and a commitment to responsible money management. As Ryan shares his lessons learned, we are reminded that the road to financial stability is paved with honesty, discipline, and a willingness to confront our own shortcomings. So, before reaching for the apparent solution of debt consolidation, take a moment to address the real problem and set yourself up for long-term financial success.

Free Tools and Downloads at www.debtfreedad.com

Connect With Brad

• Website - https://www.debtfreedad.com
• Facebook - https://www.facebook.com/thedebtfreedad
• Private Facebook Group - http://www.facebook.com/lifewithoutpayments
• TikTok - https://www.tiktok.com/@debt_free_dad

TRANSCRIPT:

Hey, contrary to popular belief, debt consolidation is a terrible, terrible idea and it actually leads many people into more debt. If you have thought about, or are considering debt consolidation to ease your financial stress, you are going to want to stick around for this episode. My name is Ryan Nelson, one of the co-hosts here at Debt Free Dad podcast. I paid off over $160,000 in debt and when I was in debt, I was the king of debt consolidation. So today I'm going to share two reasons why debt consolidation typically doesn't work and the only time, in my opinion, when you should maybe consider it as an option. As I said, I was the king of debt consolidation, so here's a quick rundown of all the ways that we tried debt consolidation when we were trying to get out of debt Home equity loan Check. Home equity line of credit Check. Balance transfers to other credit cards Check. 401k loan Check. Personal bank loans Check. And every time we did one of these consolidation loans, our mindset going into this was we are going to pay all these credit cards and loans off. It gave us a huge sense of accomplishment, like we really did something, like we really paid these things off, and by doing this, you know we're going to save X amount of money per month. And then we're going to take that extra money and we're going to put it on this loan so that we'll pay that loan off really quick, and then we'll be out of debt. And at first we did that. You know, we went through it and we had a really great start. You know we would do it for a few months. You know we would pay extra on the loan, and then then extra money every month started to have better uses in our eyes. Right, we wanted some new furniture? Well, hey, we have this extra money. Hey, we do want a new car. We have this extra money. We want some maybe extra toys for the kids or things for the kids? Hey, we have this extra money. I want a new TV? Well, great, we have this extra money. And so we started spending it. And when that extra money was used up, we started using the credit cards again that we had paid off with this consolidation loan, or how we consolidated. This was the cycle we did for a number of years until we hit the end of the road where debt consolidation was no longer an option due to the amount of debt we had accumulated. That is how we ended up in $160,000 in debt over all the years, and all under the disguise that debt consolidation was the answer to our problem, that we were going to fix our financial problems and financial stress by consolidating to another lower payment. So here's what I learned through all of this and I want to pass this on to you before you make the same mistakes that we did. Number one debt consolidation is sold to you and it was sold to me. It sold to all of us as a way of almost like a get out of jail free card. Go look at how it's advertised. You're going to see that many companies offer it as pay off all your debt with one lower payment. And when you consolidate your debt, the reality is you don't pay off any debt, and let me say that again in case you weren't listening when you consolidate your debt, you didn't pay anything off. That's how it's marketed to all of us and that is how it has made us to feel like we paid off all of this debt. What you are doing when you consolidate is you are just taking all of your debt and you're just giving it a new home and you're giving it a new name to pay every month. Yes, the payment may be lower, but you did not pay anything off, and I think we have to get out of this mindset. The way that we're being told it's going to solve all our problems, it's gonna pay off our debt. It doesn't pay anything off. It simply moves all your debt to a new home and you have another place to make a payment now. So, like me, it's gonna feel amazing after consolidation and you no longer have all these payments. You're gonna have a lower payment. You will feel like you've accomplished something by quote-unquote, paying these cards off, freeing up extra money each month. But did we fix the problem? That was always the question. Did we fix the problem or did we just put a band-aid on the issue? That needed much more than a simple band-aid. This leads me to my second point, and I think this is the biggest point of all of this is how you and I behave with money is most, most of the times not all the time, but most of the times for many people is why we have to consolidate to begin with. So let me say that again the way we behave with money is the reason that we're having to consolidate to begin with. You see, consolidating takes the real problem out of the picture. We are not forced to look at ourselves in the mirror and realize that we're the reason that we're in this big mess, and I did it for years. I use consolidation as the way to just, you know, get a lower payment, not address the real problem and kick the can down the road until I couldn't kick the can any further. And we use that consolidation as our band-aid to continue on with our life of poor financial behaviors. It allows us to keep spending and doing the things that we shouldn't do. By giving us this lower payment, the sense of accomplishment, the sense like we finally figured this out, when in reality we haven't figured anything out. We just added another line to our debt and, just like me, if you don't fix the behaviors, you're gonna use that extra money each month poorly, just like we did. You're gonna start using credit cards that you promised to never use again. You will buy unneeded things that you said you wouldn't buy and, before you know it, you're gonna have a consolidation loan payment every month and Credit card payments and other payments. Maybe you bought some new furniture and you financed that furniture because you have this extra money every month, but pretty soon you have all these credit cards and other payments showing back up in your mailbox again. And this is exactly how it happened with us is how we just kept digging ourselves deeper. We did the consolidation loan. It felt great. Poor behaviors took over, we started getting all these others, started charging things again and now we had a consolidation loan plus all of these other bills showing up in our mailbox. So take it from me, someone who did this over and over and over you need to fix your financial behaviors before debt consolidation can be considered an option. This is my point where I think, where I do think consolidation can be effective. I'm not Against debt consolidation at all costs. I think debt consolidation can be an effective measure to get you out of debt. When we finally fixed our financial situation, we did consolidate and it finally worked. But it wasn't until we fixed the real problem, which was us our spending, how we behaved with money. When we fix that, that consolidation can be a solid option for you. But if you're skipping over that step, if you're skipping over the part where you have to fix you it, I'm gonna tell you, for most people it's not gonna work. It's gonna feel good for a while and you're gonna find yourself in a lot more debt down the road. So, if you're thinking about consolidation, I hope that this episode has given you some things to think about before you reach for that Band-aid. Address the real problem. Yes, it's scary to do that. It was scary for us and it is a scary thing to do, but your financial life is gonna be far better off the sooner you do that. Hey, if you're looking to take control of your finances, head over to debtfreedadcom, where we have tons of free resources where you can get started today. So thanks for listening and we will catch you on the next episode.