By Mwangi Muiruri

As economic hardships bite hard, to stay afloat, many people resort to borrowing.

But even with the borrowed cash, effects of inflation and impulse buying are pushing borrowers to the wall.

This is why financiers are coming up with rescue packages in the name of debt consolidation.

A business consultant, Mr Wanjumbi Mwangi, says debt consolidation means taking one loan to pay others.

He says this is done to secure a lower interest rate or a fixed rate for convenience of servicing only one loan. "Debt consolidation involves lumping a number of loans into one loan," he says.

Mr Martin Omonsa, a financial consultant at Intercross Financial Consultants, says security enables one to qualify for a lower interest rate but has a major disadvantage.

Borrowers risk losing property or assets if debt consolidation works against them, when they fall pack in loan repayment.

"In some cases, the lender goes for a foreclosure (forced sale) of a borrower’s security to pay back the consolidated loan," he warns. He explains: "If the borrower defaults on the loan, the lender moves fast to repossess the security." Omonsa says the arrangement provides a buffer to the pressure of servicing the problematic loan, especially if the instalments and interest rates are renegotiated.

Credit consultant

"It is better when lenders provide discount on the amount of the loan since money injected through offer of another asset as security offsets a major chunk of the loan," he says.

However, he cautions that some lenders take advantage of a borrower’s vulnerable moment. Ms Winfred Achieng’, a credit consultant says: "Prudence calls for sound advice on the new agreement and commitment must be weighed carefully."

She says most vulnerable are credit card debtors. "They are cornered because consolidators attach larger interest rates on credit cards than other unsecured loans," she says.

Achieng’ says those who should consider this ‘rescue package’ should be car and house owners because their assets provide security.

High fees

She urges consumers to be wary of high interests because most lenders "can take advantage of refinancing to charge high fees".

"Sometimes lenders will deliberately wait until you are boxed into a corner by the loan. In the desperation that ensues, they will sweet talk you into an agreement of a refinance," she says.

In some cases, owing to little understanding of how lenders operate, Wanjumbi says, "the practice of unfair and abusive loan terms has grown roots."

He warns: "It is a proven fact that debt consolidation only treats the symptoms of debt but not the problem."

He says in some circumstances, just letting the debt run its full cycle may be a better solution.

"This is where you avoid shifting to another debt but rather you engage your lender for a renegotiated settlement," he says.