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Financial Planning

Clients asking about debt consolidation? Here's what they need to know

More and more people are using credit cards and loans to try to make ends meet. Now add on unexpected medical bills and student loans, and a significant debt burden can put a severe dent in any long-term retirement planning.

Have clients approached you with questions about debt consolidation? We've compiled some of what your clients need to know about this option and hope you can use the information below to frame your discussion with clients about debt consolidation.

Does your client know what debt consolidation really means?

As you know, not all debt is the same. But your clients might not know there are different types of debt and that the type of debt matters when it comes to thinking about debt consolidation.

Credit card bills, medical bills, personal loans and payday loans are all common types of unsecured debt that often get consolidated.

If your client wants to explore ways to reduce their debt burden, explain that debt consolidation is an option that would allow them to potentially pay off several outstanding debts with a new loan that would require monthly payments. Once you are confident that your client knows what debt consolidation means, explain to them how it works, the pros and cons and if it is an option they should consider.

Do your clients need to consolidate their debt?

Since debt is often emotional and causes a lot of stress, gain your client's trust so they feel comfortable working through the problem with you.

Tell them that you would like to get an honest accounting of their debt situation and walk them through their financial situation, both short- and long-term. Use visual models or other tools to show them their monthly payments and interest to see where they can benefit from prioritizing debts or paying more aggressively.

Explaining how debt consolidation works

Let your clients know that there are several options you can help them look into depending on their particular needs.

1. Credit card balance transfers

In this case, credit card companies allow people to transfer existing credit card debt from other cards, usually at a low-interest rate for a set period. One typical example your clients might see is an offer of zero percent interest for 24 months.

2. Fixed-rate loans

Explain that with a fixed-rate loan, your clients would take out personal loans that would cover all (or most) of their outstanding debts. They would pay off the debts with the loan and then pay back that loan in fixed monthly installments.

3. Home equity loans

If your client owns a home, make sure they know that this option would have them borrow against its value, minus what's owed on the mortgage. It primarily operates as a second mortgage. With this lump sum payment, clients can pay off outstanding loans.

4. 401(k) loans

Your clients might have a 401(k) plan provider that allows those younger than 59 1/2 to borrow against the vested balance in their account. Make sure they are aware of the potential risks and dangers that come with borrowing from a 401(k); highlight how this option is problematic unless it's a last resort.

The pros and cons of debt consolidation

Finally, cover the pros and cons with your client, so they have the full picture.

Pros:
  • If your clients develop a system to aggressively pay down debt, it's possible to save money over the long term through reduced interest rates and charges.
  • Some clients might be able to secure a better interest rate through a bank or home equity loan than they are paying currently. It can help save money long-term.
  • Paying off debt can help prevent possible bankruptcy, which can have a big impact on credit ratings and your clients' financial futures.

Cons:

  • 401(k) loans can potentially increase retirement risks.
  • Sometimes it's difficult to get a personal consolidation loan from a bank, especially if clients have a lot of outstanding or late debt, or poor credit.
  • Explain that if your clients default on payments, they can see serious financial repercussions.

While you're having this discussion, remind clients that while debt payment is important, saving for retirement is, too. They need to strike the right balance, especially if they want to meet their retirement goals.

Learn how to help your clients plan for all phases of retirement.

SM.1381183.09.19

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