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Consolidation Loans are a great tool, especially when you carry multiple low-three figure balances with sub-prime (some call them predatory) credit card companies.
What I have yet to see is one that offers discounted interest rates to people who don't take on new debt or keep charging on the accounts
they just zeroed the balance with the funds from their consolidation loan.
The way it works is Borrower agrees to have Consolidation Co. monitor their credit report for the term of the loan, to watch for new debt accounts being opened, new credit lines being opened and closed, and existing credit lines being charged back up or raised.
Borrower gets reduced interest rate & fees on the condition that balances are paid off and no new balances are created. Borrower agrees that if new accounts or new debt are reported by two of the three credit bureaus, Borrower has broken their Reduced Fees & Interest Rate Agreement, allowing Consolidation Co. to raise the interest rate and fees to the highest allowed by law. Borrower can only return to the reduced interest rate back if Borrower makes a payment that is at least 50% the total Remaining Balance in 1 payment on their consolidation loan with Consolidation Co.
Of course, no prepayment penalties.
This is an unconventional loan contract so this may not be legal in all states.
I think this is a great idea, a debt consolidation loan company that rewards & incentivizes borrowers who use their consolidation loan to pay off their debts.
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This just creates a bad book, doesn't it? Your customer base
is individuals who already have accumulated debt that they
need assistance with, so they are a strong risk that they
will accumulate more debt. This leads to the penalty
interest applying, which puts them into personal insolvency
risk. Even if you can get this past the regulator in your
jurisdiction (I struggle to see how it could fly in the UK),
the only reason for a lender to do this is to generate a high
interest, high volume, high default debtor book which can
be sold onto specialist collections organisations who will
squeeze those who don't get tipped into bankruptcy. |
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Won't people be discouraged to participate in this because
they fear that the constant checking of their credit will
harm their credit? |
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calum:
"This just creates a bad book, doesn't it? Your customer base is individuals who already have accumulated debt that they need assistance with, so they are a strong risk that they will accumulate more debt. This leads to the penalty interest applying, which puts them into personal insolvency risk.
...
the only reason for a lender to do this is to generate a high interest, high volume, high default debtor book which can be sold onto specialist collections organisations who will squeeze those who don't get tipped into bankruptcy." |
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There is a legendary finance and business book that details the 3 main money mindsets across society. It's The Millionaire Fastlane by MJ Demarco. There are: |
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Sidewalkers - Lives for today at the expense of tomorrow, "Credit allows me to buy things now!".
Slowlaners - Lives for tomorrow at the expense of today. "Debt is evil! It must be religously attacked, even if that means working overtime for life!"
Fastlaners - Builds an business asset from scratch, grows it with the goal of hands-off operation or selling. Business centers around Control, Entry-barriers, solves a need, eventual seperation from your time, and high scaling probabilities. Fastlaners live below their means with the goal of expanding their means through fast wealth accumulation. Fastlaners only take on debt for profit-producing intelligent risks. "Debt is useful if it allows me to build and grow my business system. Consumer debt is parasitic, and steals from my free time." |
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Sidewalkers rack up debt, and consolidate only to take on new debt and keep charging. Sidewalkers live beyond their means. Their lifestyle is built on credit and yesterdays paycheck. Irresponsible with money, careless with debt. |
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Slowlaners pay down debt, and consolidate to save on fees and to simplify paydown. Slowlaners who stick to the plan don't take on new debt sidewalker-style. |
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Slowlaners would benefit from a consolidation loan that rewards debt payoff, based on their credit file. I can see how this business model can create a bad book, and it's an all-or-nothing approach. |
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notexactly: "Won't people be discouraged to participate in this because they fear that the constant checking of their credit will harm their credit?" |
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What do you think about this: Reward debt paydown, after the final payment has been recieved by Consolidation Co, by returning X% of the interest paid if the Borrowers credit report reports a outstanding debt level at least 33% lower than it was compared to the loan origination date, excluding mortage and medical debt. A normal consolidation loan with a twist. but with a reward at the end for financial responsibility. Slowlane Borrowers will be rewarded with a big check for responsible debt payoff, and it doesn't have Consolidation Co. watching the Borrowers credit report through the life of the loan. Compare two snapshots, if the second snapshot reports less debt, Borrrower gets the reduced interest rate applied retroactively and recieve a check for the difference in interest. |
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So, a consolidation loan that works like a regular consolidation loan, but pays some interest back to responsible Slowlane Borrowers with a big check at the end. We could make this the model of the future! |
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It would be madness to consolidate without a financial advantage. If this is a cheaper consolidation then all the better. But to know that would take money sense. It's a catch 22. Non money sense is how the borrowers got into trouble in the first place. |
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Budget advice and learning is usually the only answer. |
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