Reverse the Excessive Debt Spiral

Cale Henke

For years, I have looked at credit reports that routinely have excessive credit card debt, car loans higher than car values and multiple open revolving accounts advanced fully to the allowable limits. When addressing these circumstances with the borrowers, a majority of them explain their debt is a result of being uneducated when they were younger and living by their wants versus their needs.

— Cale Henke

Vice President and Retail Banking Area Manager
TheBANK of Edwardsville

“So many clients live with the mindset of just being able to make the payment and have never worried about paying the debt off,” he said. “Now that they’ve ventured further into their lives and careers, they’re paying for items that should have been paid off much earlier and they’re experiencing the effects choices made early on have on their ability to upgrade today.”

Not every situation is the same, but the results often are – a family living paycheck to paycheck and struggling to pay off debt for decades instead of years.

“I’ve helped several clients with the same scenario,” Henke said. “But these two examples are complete opposites of each other.”

In the first scenario, Henke’s client was paying close to $3,000 a month in minimum payments towards credit cards. The client routinely made the payments for several years, but gained zero progress in reducing the principal on the credit card debt.

“I’m working with the client to consolidate all the debt into one loan for a five year period,” he said. “This will lower his monthly payment to $1,400 and will satisfy both principal and interest. So what would have taken him 15-20 years to pay will now be paid in full in just five years, with a monthly payment approximately half of what he was paying before.

“It wasn’t the fact the borrower couldn’t pay the payments, it was the higher minimum payments not allowing for principal reduction.”

In the second scenario Henke offered, clients are making improvements to their primary residence, and in the past they had taken on more debt with second mortgages or other secured options.

“I’m working with the borrowers to consolidate everything into one mortgage and continue paying the same payment amounts towards the single mortgage balance,” he said. “In doing so, the borrowers will be able to make the necessary improvements to the residence, decrease the amortization on their mortgage and increase their net worth at the same time.”

Debt can oftentimes feel suffocating. But Henke said it doesn’t have to be that way.

“I work with each and every client to maximize their income by consolidating debt into payments that satisfy both principal and interest. That’s the key,” he said.  “I provide potential clients with examples of aggressively paying debts by adding a few more dollars above the required minimum payments to show how much interest can be saved while decreasing the balance and term of the debt.

“The end goal is to be able to increase liquid assets, improve credit scores and re-establish purchasing power for items they need versus items wanted.  It’s a behavioral education in finance.”

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