How do I explain why debt on debt is bad to my brother?

Question

My brother has about 5 loans that he paying back and he thinks that another 5000 loan will "solve his problem".

He has been this way since he was young, he's now in his 30's.

I'm trying to find a way to explain to him that debt upon debt isn't the solution and he is going to have to spend 5-10 years paying back all the loans and that each one locks him down more and more to a cycle of working to get by in the month.

My main question is: do you know of any slideshow or presentation or game that explains these things? Wordy answers are great for normal thinking people but I think I need more emotive means than just text or words (the internet is full of it). Even a video showing these things would be great.

Here are some facts on the loans (all maxed out already, in order of interest rate more or less):

• 65,000 car loan remaining
• 35,000 personal loan
• 7,800 clothing store account
• 35,000 overdraft,
• 8,000 loan from me

Try not to give the usual advice of: paying the highest interest first, reducing interest rates where possible, going on debt review, reducing unnecessary expenditure or that he isn't moneysmart (clear) and has acted on impulse one too many times.

Note: Values are in ZAR not in USD, so the equivalent USD value (in living expense terms) would be (1/2) half of the numbers above. His income is 12,600 per month excl taxes.

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Update 2015 (4 years later): Good news, my brother is finally debt free for the first time in his life! Nearing 40 and starting to save money for once. He is much happier and settled now. What was the solution? Well, a bit of everything. I spent time with him back then, showing him how to cut costs here and there, to work from the highest interest rate first, a bit a reality check etc. Me and our parents helped him with a few loans now and then (interest free; ONLY to move debt from third parties and back into the family rather), but he ALWAYS paid back the money he borrowed from anyone.

Answer 1

I wouldn't try to tell him what he should do, nor would I provide any financial assistance. Invite him over and tell him how a Dave Ramsey book changed your life or something so that you aren't the one telling him what to do.

People in fundamentally and persistently bad situations are like people with addiction problems... they tend to end up "killing the messenger" before internalizing that they are in a bad situation. They need to hit rock bottom before you can really help.

Answer 2

Talk about opportunity cost.

Show a rope, and put a tag with him on the end of it. Explain that since he has max out his credit, he can no longer get more. Without more credit here are the things he can't have

• New car
• New house
• New TV
• New clothes
• Fancy restaurants
• Vacations
• Concert Tickets
• New cell phones
• Other free time activities he enjoys

The key to illustrate is that all the money he makes, for the next several years is obligated to the people he has already borrowed it from. Try to have him imagine giving his entire paycheck to a bank, and then doing that for the next five years. To drive it home, point out that there are 5 super bowls, 5 college championship games, 5 final fours, 5 annual concerts he likes, 5 model years of cars, 5 or more iPhone versions in those five years. Or whatever he is into. 5 years of laptops, 5 years of fishing trips.

These things are not affordable to him right now. He has already spent his money for the next 5 years, and those are the things he cannot have because he is, in fact, out of cash.

Furthermore, if he continues, the credit will dry up completely and his 5 year horizon could easily become ten.

To illustrate how long 5 or 10 years is, have him remember that 10 years ago he might have been in college or the military. That 5 years ago Facebook was no big thing. That 5 years ago the Razr was an awesome phone. That 5 years ago we had a different president.

Answer 3

The key idea he should focus on is that every debt includes interest - the money he didn't borrow, but now owes.

The interest goes straight to the lender pocket and the debtor has to get money somewhere for that interest. That's the key reason of why getting another loan only increases pressure on the debtor - with the new loan he owes new interest in addition to what he already owed.

Answer 4

Two suggestions:

I don't know if you have them in South Africa, but here we have some TV reality shows where a credit consultant visits a family that is deeply in debt and advises them on how to get out of it. The advice isn't very sophisticated, but it does show the personal impact on a family and what is likely to happen to them in the future. "All Maxed Out" is the name of the one I remember. "Till Debt Us Do Part" is another, which focusses on married couples and the stress debt puts on a marriage. If you can find a similar one, loan him a few episodes.

Alternatively, how about getting him to a professional debt counsellor?

Answer 5

If you're looking for an analogy or exercise, I saw a personal finance show that had people climb stairs, with the debt as weight. Every flight of stairs more "interest" and loans to cover income gaps have to be added to the total debt they carry up the stairs. Can't find the video online though.

But I think you need to ask your brother what he thinks his problem is, that will be solved with more loans. It's likely that your brother's problem can't be solved with advice. Since he's not spending rationally, rational arguments have no sway. I suspect he'll tell you his problem is one or two angry creditors, perhaps even ones you don't know about, rather than a fundamental imbalance between income and expenses. Robbing Peter to pay Paul, or moving weights from one backpack compartment to another, doesn't solve the underlying problems.

Whatever you do, another loan from you should be off the table. He's an adult now, with problems the size of which you can't help with. We both know how his story ends: all creditors cut him off, and he's in court over garnished wages and creditors fighting over his assets. Reality is the only argument that will have any sway. He's far too personally invested in his scheme to admit defeat, which is why neither words not images nor moving pictures will help him with this learning disability.

Answer 6

How about doing some calculations and show him how much he is paying for things he is buying on credit.Mix in some big and small purchases to show how silly it is on both.

Some examples:

• How much did you REALLY pay for that car when the financing costs are factored in?
• Show how much that $10 lunch will ultimately cost if he puts it on a credit card where he is carrying a balance and making minimum payments.

What really made the debt issue hit home for me (no pun intended) was when I bought my first house and read the truth in lending disclosure statements to find that a $70K house (those were the days) was going to cost me over $200K by the time I had paid off a 30 year note.

Answer 7

I'm not good at persuasion, and I'm not an expert at any of this, but here's what I've been thinking.

Rather than telling him that he shouldn't rack up more debt, I'd ask him whether he's planning for his debt levels to increase, remain static, or decrease over the next five years. Try to make it feel like he's the one reaching the conclusion that he should be decreasing his debt load.

If he says that he's fine with his debt levels remaining static or increasing, then I don't have any further advice.

If he says he's trying to decrease his debt level, but it's actually increasing, then maybe he's in denial.

Answer 8

The only thing that comes to mind is a recent HBO Real Sports segment (http://www.youtube.com/watch?v=WDjkbgrgcmo) on a couple of NFL players who blew all of their money. Seeing how they've ended up might make the right impression, but given that your brother ran up $148K in debt, I'm not optimistic.

Answer 9

This is not the case with your brother only. There are many business which run on this premise. It goes till the time all the conditions are in control and get busted when things goes out of way.

You have mentioned the loan amount and not the monthly repayment amount. Even if you say, a new loan will not solve his problem, what are the way out ?

Telling things nicely sometime does not work especially when facts are otherwise. Hence you need to make a compete case study which should also consider his capacity to pay.

As of now it seems he has debts of around 20 months of his earning, which can be considered high, depending upon the terms of major loan such as car loan and personal loan.

A case study is way out. You can explain him with such case study that he should not go for further loans.

Answer 10

I'm not sure how much living expenses are there but half of $12,600 in the US would be a decent monthly income. I agree that debt on debt would just add to his problems, sort of like quicksand, the interest will just makes a person sink deeper and deeper. It seems like it might take some more radical options here to pay off the debt. Like, could he move into a much smaller home or get a roommate? How expensive was that vehicle? Could he sell it and pay cash for a much cheaper used one and use the difference toward his debt? How much does he work? Could he get a second job for just a few hours to help make extra money? Is he willing to speak with a debt counselor?