Mar 1, 2024
The average American consumer had $104,215 in debt, according to Q3 2023 data from credit bureau Experian. However, that number is skewed by some households that have far higher debt balances.
Robert from Chicago, Ill. is clearly in that group of outliers.
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“I’m in big financial trouble,” he told hosts of “The Ramsey Show” last year. “We owe over $1 million all in together, including mortgage.”
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Robert’s troubles are amplified by the fact that a significant portion of his debt is from personal loans that he lent out to other people as investments. Co-hosts Ken Coleman and Jade Warshaw were in disbelief, with the latter describing the situation as “ridiculous.”
Here’s how Robert found himself in this position.
Trying to be smart
Much of Robert’s debt is above average. He has a $462,000 mortgage, $96,000 in private student loans and $42,000 in auto loans. By comparison, the average consumer had a $244,498 mortgage, $38,787 in student loans and $23,792 in auto loans, according to Experian. He also has a $50,000 solar panel loan.
Put simply, Robert is in a deeper hole than the average consumer. However, he’s managed to make matters worse by applying for personal loans and lending the money out to others. “I’ve been trying to be smart and it didn’t quite work out,” he said. “One guy stopped paying, and it’s so much stress. I’m done with it.”
Robert says he has around $225,000 in personal loans from some online platforms, and some credit card debt on top of that.
The married father of two doesn’t say how he found borrowers to do business with, but some Americans have signed up for peer-to-peer lending networks that highlight high returns. However, unsophisticated lenders on these platforms might overlook the fact that default rates on these loans can be as high as 14%, as observed in a 2022 study from National Kaohsiung University of Science and Technology that used public information from Lending Club.
Borrowing money to invest in private loans is significantly risky.
“It's one thing to take out debt for yourself, it's another thing to take out debt like some kind of a loan shark and loan it to other people,” said Warshaw.
To dig himself out, Robert needs to make tough decisions.
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Tough choices ahead
Robert and his wife make a combined monthly income of $10,000. That’s insufficient to tackle his million-dollar debt pile, according to "The Ramsey Show" co-hosts.
Robert estimates his house is worth $600,000, while his equity in it is somewhere between $120,000 to $130,000. Nevertheless, selling the house is a potential option, as well as the solar panels, and he’s already decided to sell off the car. These asset sales should unlock some cash for Robert to chip away at his debt pile.
To truly mitigate debt, Robert and his wife need to work more to raise their income. His target is $15,000 in monthly income. Warshaw advised them both to work full-time and get side jobs.
“You guys are about to work your booties off!” she said, adding they have “no breathing room here.”“You need every dime that you can get … it’s not going to be fun.”
Of course, Robert’s top priority should be to avoid borrowing any more money to lend to others.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
