Wednesday, February 7, 2007

Borrow to get out of debt - a smart move?

I've decided to give a try to borrow funds for real estate investments. As I have been browsing through the listing it strikes me how often people are wanting to borrow money to get out of debt. And the interest rates that these people are offering to pay are not some cheap rates - they are 17-25% interest rates. Does this make sense at all?

There's a massive lending industry that has been created to ostensibly help you get out of debt. Lenders try to make you feel that if you "consolidate" your loans or use your home equity that you will finally be able to break the cycle of debt. This is excellent marketing but I doubt that it is very sound financial advice.

Spending more than you make is a very bad habit to be in - and make no mistake, it is a habit. And for anyone who has had a bad habit (I once smoked), you know that habits are extremely hard to change. Everyone that smokes, for example, is well aware that cigarettes are literally killing them, yet even when offered financial rewards to quit, most people will continue to smoke.

So, what makes you think that by consolidating your debt, that somehow you can break the habit of spending more than you make? This illusion that the lending industry has created that by consolidating debt actually encourages us to spend more, since we trick ourselves into thinking that we are better off. For many people this leads to an ever downward spiral towards bankruptcy or foreclosure. In my real estate business, I see the pain that this brings to peoples lives both in sellers and buyers. A house I recently sold as a "Rent to Own" attracted over 1000 calls in 4 weeks from a simple sign in the front yard. Nearly every one had been through some financial crisis that prevented them from buying a house through conventional methods.

The only real way to break a bad habit is through self-discipline. And this is true of debt habits.

  • First, you must start living on a budget that is within your income. Many people tell themselves that they can't do that. Read this post on beliefs and think again.
  • Second, you must use a disciplined method to pay off your debt. The snowball method seems to be the best way.

Once you've taught yourself to live within your means, then you can figure out how to increase your lifestyle. Don't do the later before the former. Some people chose to spend their lives constantly being frugal. I do not advocate that approach, I think you should concentrate on generating more revenue. Increase your value by getting more educated, starting a business or investing in real estate. But remember, first get your financial house in order by living within your means - no matter what your income.

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