Dave Ramsey Claims That 88% Of People Who Take Out Debt Consolidation Loans Have Debt Come Back — Is This True?

American financial guru Dave Ramsey claims that 88% of people taking out debt consolidation loans end up seeing that debt grow back. 

During an April 10 episode of "The Ramsey Show," caller Gordon from Seattle asked for advice on his personal loans. Gordon explained that he is liquidating his after-tax investment accounts and cleaning out his savings. He wanted to know whether it would be worth taking a loan from his 401(k) to pay off his personal loans. With the interest on the 401(k) being paid to himself, Gordon wanted to know whether this method could help him get out of debt. 

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With $22,000 in personal loans, $30,000 in student loans and a $1,000 emergency fund, Gordon wanted to consolidate his loans into one loan. Ramsey asked Gordon how much the liquidated investments would create. At no more than about $14,000, Ramsey nixed the 401(k) loan because Gordan would still have debt to pay off. With his income, Ramsey feels Gordon could pay the remaining debt off within a year without a 401(k) loan. 

Ramsey explained that trying to use a 401(k) loan to eliminate debt is a risky move that can leave you vulnerable because you have to pay off the loan (or face taxes and penalties) if your job ends. Ramsey said, "We call it a con because you move all your debt from one place over to another place into one big loan." For some people debt consolidation loans don't help because all you've done is move lots of smaller debts into one big debt, you've just changed how your debt looks. Doing this with a 401(k) is even riskier. 

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Ramsey shared some facts about debt consolidation loans, "We know from the debt consolidation industry that 88% of you, that's nine out of 10 that take out a debt consolidation loan, your debt grows back." Ramsey adds that taking out one of these loans can land you in twice the amount of debt if your behaviors and habits don't change. 

Forbes Advisor found that the majority of people who took out debt consolidation loans thought that they would be in debt again — 18% believed that they would fall back into debt within 6 months and another 35% within 6 months to a year. Only 4% of borrowers believed they would be debt-free after taking out one of these loans. 

While a consolidation loan may temporarily take a weight off your shoulders, it doesn't solve your debt problem. Ramsey reveals that his years of offering financial advice have shown him and his team that money problems are not math problems — they are personal problems. He reveals that managing your personal finances is 80% behavior and 20% theory. 

Taking out a consolidation loan without addressing your behaviors is like putting a bandaid over the problem. In fact, according to Ramsey Solutions, one of the most important characteristics of a debt-free person is self-control. 

George Kamel, co-host of The Ramsey Show, explains, "These are all shortcuts at the end of the day, and it feels like you did something when you take a shortcut. But the problem is, like you said (referring to Ramsey), you're going to be right back where you started. When people do these 401(k) loans or the HELOC (home equity line of credit) or whatever the move is, they actually end up in the same place they were a year from now." Kamel reveals that you've got to change your habits if you want to see different results.   

One of the biggest reasons people’s debts grow when taking out a consolidation loan is that it encourages spending. Why? Because taking out loans gives people the illusion that they have money and that's it okay to keep spending without adjusting their budget.  

Consolidation loans provide only temporary relief. One of the best ways to start tackling debt is by making serious changes to your financial habits. Some of these changes include things like limiting unnecessary expenses. Ramsey recommends having a written budget where all your money coming in and going out is recorded. 

Debt consolidation loans might work for some people, especially if they're struggling to pay off multiple high-interest loans and they have a high enough credit score. Taking out one of these loans may help reduce your monthly payments and help you streamline your finances.    

Get individualized advice for your unique financial situation by seeking advice from a financial advisor and start making healthy financial changes to tackle your debt.     

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