Would you rather deal with one angry bulldog or ten angry chihuahuas that are jumping and biting you from every direction?
With one bulldog, at least you can draw up a strategy and figure a way to calm it down and tame it. Taming ten angry chihuahuas, on the other hand, is not easy. It is possible, but it is not easy.
This is the same case with your debts and liabilities. For example, you might have a loan from your local bank, SACCO loan, HELB, rent arrears, as well as a ‘Ka-Mshwari’ mobile loan.
It is now the end of the month, and all these lenders have come knocking. However, your income this month is not enough to cover all of them at once. So what to do?
What if I told you there is an option of paying all this at a go? Yes! As crazy as it sounds, this is possible.
No, it is not magic! It is known as a debt consolidation loan.
With more favorable terms, like lower interest rates or lower monthly payments, you can use a debt consolidation loan as a tool to deal with the headache of servicing your loans and liabilities.
Sure, it does not mean you are now debt-free. However, it is a more efficient way to deal with your debt issues without getting depressed from all the calls coming in from the creditors.
So, let's find out what exactly is a debt consolidation loan and what options you might have.
The term consolidate is derived from the Latin word ‘consolidatus,’ which means "to combine into one body." Therefore, in a simple language, debt consolidation means taking one loan to pay off all the other individual debts.
The idea is to get a single lump sum loan to pay off all the other high-interest loans. This larger loan usually has more favorable terms - otherwise, it wouldn’t be interesting at all, right?
Just like taming a larger dog, a debt consolidation loan gives room to wiggle and make a better plan on how you will repay your debts without having to remember and keep track of different debts.
As mentioned above, the idea is to get one big loan to cover all your smaller loans. This way, you only have to make one payment a month instead of several.
So, once you decide this is a route you want to take, you first need to find a bank or a lender who offers this kind of service. The application process and all the due diligence vary depending on the lender. However, it usually goes something like this:
Once approved, the lender will either contact and pay off your previous lenders directly or make available the cash for you to deal with the earlier lenders yourself.
Like regular loans, there are two main types of debt consolidation loans:
At first glance, the idea of not having a couple of lenders on your back every month can be very enticing. However, there are a few things you need to know before you consider this option.
A debt consolidation loan does not erase your previous debts. It may result in lower monthly repayment amounts, but you are still in debt. If anything, it may make the amount you need to pay larger and push you further into debt. - The service has a fee to consolidate the debts, which is added to the initial amount.
In some instances, the risks may be higher than the benefits. At the end of the day, you might find that it is easier to deal with the small debts individually than to consolidate them.
For example, suppose you get a secured debt consolidation loan and use your car as collateral. In that case, there is a chance you might lose it if you default with your repayments—that is why it is not recommended to consolidate unsecured loans with a secured consolidation loan.
It may not be a good idea to apply for a debt consolidation loan if you are only running away from your responsibilities. Without a proper plan on how to dig yourself out of the debt avalanche, you will only add to your burdens with a debt consolidation loan.
So, before you decide that this is a good option for you, first lay down a proper plan on how to approach the debt.
Although debt consolidation might not be for everyone, knowing the advantages and disadvantages is crucial. It will allow you to weigh your options better. So, here are the pros and cons of using a debt consolidation loan to offset your smaller debts.
Debt consolidation can come in handy to save a dire situation. For example, it can help roll together credit card debts, mobile loans, and other high interests loans into a single lower-interest loan that is more manageable. It is also an excellent way to keep them calls from ruining your peaceful sleep. ‘
However, debt consolidation is not for everyone. In the long run, it might be more expensive for you to service this single loan than if you had toughened out and dealt with the small loans as they were.
So, before you choose to go this route, ensure that you have carefully considered all your options.