Elizabeth works at a manufacturing firm and has drowned herself in debt. It crept up on her slowly. It just started with that first loan to move out of home. Then came time to buy furniture, then the car, then to study a course etc. Then she joined a SACCO and subsequently took another loan. It was meant to help her invest in some land. It slowly started disappearing from her account and now she cannot actually tell where the money went. Then came the credit card. She slowly found herself using it at the supermarket and when she went out. She is now fully maxed out and is often late on her payments. Elizabeth’s exact words to me were that she feels like she is dying on the inside. She goes to work but her mind is not one hundred percent there. She has even at times made the desperate decision to get money from loan sharks at an interest rate of ten percent per month. Just to get instant cash to cover overdue rent. You may be thinking by now that Elizabeth probably has a flashy lifestyle and all this article is about is how she should reduce her expenses to get out of debt. Not really headline-making information right?
No that’s not what this is about. Elizabeth earns a gross monthly income of Kshs 70,000. After all the loan deductions i.e. various personal loans from the bank, SACCO loans, and mandatory credit card payments, she is left with Kshs 30,000. This is really not about how we are going to cut expenditure on holidays. Many of us can relate to this where we actually feel like our debt has left us with no room to breathe or move. It’s the monster that has consumed our lives.
Elizabeth, who has allowed me to publish this scenario, wrote to me to ask me a very simple question. One of the banks had offered to take up all her debt and make it one loan with one repayment. This is called debt consolidation. Apart from the credit card, they would pay off everything else so she just has to deal with one lender and make one payment. They would even stretch out the loan repayment i.e. give her more time to pay the loan. That way, her monthly repayment on her loans would be smaller. She would actually have Kshs 40,000 left over as opposed to Kshs 30, 000. This does look like a good and practical way to deal with these loans. It seems to make things so much easier. However, is easier always better? (Click to Tweet this) You can imagine the temptation to just get that extra Kshs 10,000 coming back to her. You can imagine her rush to remove this stress from her life. I even commend her for taking the time to write to me rather than automatically going ahead with it. However, the consequence of this consolidation would be that she would end up paying more interest over time than she would if she just struggled with the current loan structures. It will actually end up costing her more money.
The fact is, the longer you take to pay off a loan, the more interest you pay. There is also a very high probability that Elizabeth would use this “relief” to borrow again (Click to Tweet this). Many people who do consolidate their debt end up borrowing again. It may not be debt consolidation that is tempting you with an easy way out. It may even be an increase in income or a kind relative who has paid a portion of your loans. Debt, like many things, can be a trap – an addiction. The issue with Elizabeth is that her way of managing bigger financial expenditures was to borrow. That is the disease. Her debt, or financial situation, is just the symptom. Even now, her car needs repairs. Once the gap to borrow presents itself, it would be very tempting to instantly get a loan to finance those repairs. There’s always something to borrow for. When your solution is automatically debt, do not put yourself in a situation where that solution will easily present itself. I dissuaded Elizabeth from taking this offer from the bank because it makes it easy for her to forget the pain. It’s better for her to go through the hard work of getting out of this loan from her current situation. The hard work will not be forgotten and you remember the consequence. Just like a child remembers not to play with hot water when they get burnt.
Another reason I suggested that she does not take the easy way out, was so that she can actually see that she had the ability to get out of debt. Many people don’t think they do, but they actually do. We get out of debt by paying off our debt, plain and simple. I get so many enquiries about how to pay off debt. Well, there’s your answer. We pay off debt by having money to pay off this debt. Your ability to pay off debt is directly linked to your ability to see where this money will come from. We usually want our debt to sort itself out while we are in the comfort zone. Elizabeth does not have a flashy lifestyle, but she has a car she can sell. A car that she probably would have thought twice about buying in the first place. A car she is struggling with, and would borrow further to maintain. Most people can start getting out of debt by making that first difficult decision. E.g. there’s a cheaper place to live, there are more affordable schools, there’s a more efficient way to manage food costs, airtime can be put on a budget; the list can go on and on. You also have a skills, gifts and time that can be used to generate some form of income to start getting you out of debt. Avoid the easy route, because easy will probably lead you back the same way you came. Easy is addictive. You don’t want addictive, you want progressive.
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Waceke Nduati-Omanga runs programs on Personal Finance Management, Entrepreneurshipand Career Success.