Doug Constable: In this episode of Doug on Debt: we talk about what happens when you borrow money to pay debts. Alot of people in Australia buy their dream home not ever thinking about what would happen if they couldn’t pay their mortgage. But rather than offer you hardship facilities, some banks actually offer you more debt! This is on top of already rising late fee’s and later, legal fee’s if the repayments fall behind even more. Before you fall into the trap of paying debt with debt (or credit); maybe seek other alternatives to get back on top.
Some time ago I had a young couple came and see me, and they had decided to get married. They both had very good jobs and they wanted to buy a house. So they bought a house in a Melbourne suburb, for about $1.2M. They went to the bank and got a loan, and away they went.
Around that time, the wife got pregnant, and there were a lot of complications with the pregnancy, so she wasn’t able to work. Just living on his income was a little bit tight for them.
Some three or four months down the road they became unable to make payments on the house, and their bank managed asked them to come in and talk about their loan. His solution to their difficulty was to give them a credit card. This made it possible for them to pay the home loan up to date with the credit on the card.
That fixed the immediate problem, but did not fix the long-term problem.
So, just a little further down the road, there were again facing the prospect of not being able to afford the house, they were in arrears in their payments again, and they were being hassled.
Now what we discovered as we went through their case, was, the particular branch of the bank they dealt with had a system whereby every six months the staff qualified for bonuses. But if any of their accounts were in arrears, it counteracted against the bonuses. So the manager was working hard to get this loan caught up so he qualified for his bonus. So he got them caught up, collected his bonus, but now the couple had a growing credit card debt. So it really didn’t solve their problem.
And so, facing all this mounting debt, they came to see me.
Now banks can be very understanding. They have hardship facilities, and there all sorts of solutions you can pursue with a bank when you get into difficulties,
However, we need to sit down and work out what is best for you, not what is best for the bank manager.
Borrowing money to pay debt isn’t a solution.