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Clean Slate Podcast – Episode 9
In episode 9 of the Clean Slate Podcast, Juan explains the difference between debt consolidation and debt consolidation loans.
About the Speaker:
Juan Valladares is the Vice President of CreditGuard of America, Inc. and has been working in the credit counseling industry since 1997.
Juan began his career at a major answering service center, responsible for the training and supervision of over two hundred employees. Now in charge of managing CreditGuard’s counseling department, Juan’s management, organizational and motivational skills are all vital to the company’s success.
Juan is a devoted father of two and a passionate racquetball player who competes regularly to satisfy his competitive instincts. He has dedicated his professional life to helping people get out – and stay out – of debt.
“Clean Slate” Podcast Episode 9: Debt Consolidation versus Debt Consolidation Loans
Wayne: Do some people in the interest of simplification sometimes go after, say, offers for debt consolidation loans? And what’s the difference between that and debt consolidation services itself?
Juan: A debt consolidation loan is just that: a loan. Somebody is actually going to give you money. They’re probably going to pull your credit report, see how much income you make and all those types of things to make them say, ‘Ok, you seem credit-worthy enough for us to give you a loan,’ in order for you to use that money to pay off, say, your car notes or whatever types of debts you have out there.
Typically you have to go to your local bank or credit union to fill out an application. They’ll ask you for your personal income and expenses and obviously your social security to pull your credit report, and then they determine your credit worthiness in order for them to give you a loan. If you have good or excellent credit and you don’t have too many expenses or debts, then they’ll give you a loan, usually at a very, very nice interest rate. And that’s sometimes pretty good for you if you need that money to pay off some things or buys some things. But if you have poor credit, and your debt-to-income ratio is pretty high, then typically they may just deny you, or they’ll give you the loan but they’ll give it to you at a very, very high interest rate. It’s like robbing Peter to pay Paul. And in this case you’re just acquiring even more debt on top of the debt that you already owe. So I don’t really recommend debt consolidation loans for people who are looking to get out of debt. It’s just not a good way to get out of debt. There are too many other programs that are available that will allow you to manage your finances more effectively and just pay off the actual debts that you owe.
“I don’t recommend debt consolidation loans for people who are looking to get out of debt. It’s just not a good way to get out of debt. There are too many other programs that are available that will allow you to manage your finances more effectively and just pay off the actual debts that you owe.”
A debt consolidation program or a debt consolidation plan is NOT a loan. You don’t need to have really high credit or anything like that. What we’re basically doing is a restructure of your current debts, looking at your overall expenses, looking at how you manage your finances. And then, of course, you’ll only be making one payment to the plan and then we as an organization will be taking care of all of the debts that you have. You’ll essentially get all of the benefits of a debt management plan, which are lower interest rates, lower monthly payments; we’ll stop any late fees and over-the-limit penalties. All those different types of benefits you’ll receive in order to get out of debt, and the great thing is that you’re getting out of debt and you’re not incurring any new additional debt.
So the main difference is that with 1 [debt consolidation loans] they’ll give you the money but you’re incurring extra debt, but with the other [debt consolidation programs], they’re just restructuring the actual debt that you owe, giving you a significant amount of benefits. For me, that’s just a better way to manage your credit and get out of debt.
Wayne: Yeah. I can’t imagine making the pile larger would ultimately achieve the same goal as quickly and efficiently, and it seems like you still just have one payment. So it may look and feel the same, but it’s so much more efficient.
Juan: Much more efficient. We’ve had individuals who have contacted us or walked in and because their credit was poor they actually had to put some collateral down.
Credit cards are unsecure, let’s just talk about that. Unsecured debt means there’s nothing they’re going to take away from you if for some reason you don’t pay off your credit cards. There are some negative things, of course, some collection practices that are available to financial institutions, but at the end of the day they’re not going to come and take your car or your home or anything like that. The problem with taking out a loan in most cases for people who are having financial difficulties is that most financial institutions will ask for some type of collateral. And in some cases if you own a home they’ll say, ‘Ok, let’s put your home as collateral.’ And then all of a sudden you’re making this unsecured debt where nothing can ever be taken away from you to where suddenly something can be taken away from you if you fall behind on this additional debt that you’ve incurred.
Another thing I don’t like about it is that you take this money, this loan you get from a financial institution, and you pay off all of your debt, but then those debts are available to incur more debt again. So all of a sudden you can actually double your debt. It’s just not a really good way of doing it.
At the end of the day you want to be able to manage your finances, and that’s what debt management plans do. We give you an overall management tool. We give you brochures and educational materials in order to say, ‘Hey, this is a habit-forming thing. That hopefully for the rest of your life you won’t get back into this situation. Hopefully you’ll be able to better manage your finances so you can get some good buying power with lower interest rates, so when you do go buy that next vehicle, you are getting the best possible interest rate so you can save money in the long run. So if you’re trying to get out of debt, debt consolidation loans really aren’t the way to go. A debt management plan will help you with your unsecured and other types of debt.
Wayne: Mortgaging your home, or using your home as a lean on a consolidation loan for just a few thousand dollars seems like a really good deal for the bank if you don’t do a good job of managing yourself. That seems a little lopsided.
Juan: (Laughing) yeah, that’s a really good deal for the banks, not a good deal for the consumer.
Wayne: Especially when you’re scraping your last few dollars for a moving van.
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