What consolidation is or whether it pays to consolidate loans will look at these issues closer
To get a good look at it, we should start with the question – What is consolidation – consolidation loan?
A consolidation loan is a way to combine several loans into one in order lowering the monthly liabilities. With this loan, we can pay off any type of bank commitment, from credit card limits used, limits on credit lines in a personal account, installment loans through cash loans, car loans to housing loans and mortgage loans.
Debt consolidation is designed to overpower the strained home budget and its finances. The new loan is repaid with all old liabilities, and the repayment period is selected so that monthly charges in the form of monthly loan installments are easier for the borrower to bear.
However, deciding on the procedure of consolidation of liabilities should be considered with particular care, it will certainly be a good solution to use the support of a good credit advisor.
Types of consolidation loans that we can meet
Consolidation loans should be divided into two types that are available on the market:
Mortgage-backed mortgage in the land and mortgage register
In the case of mortgage-backed loans, the interest rate drops significantly to several percent of real interest. In the case of unsecured loans, the interest rate will be close to the cash loan price, ie a dozen or so percent.
What is consolidation or whether it pays to consolidate loans?
The ability to convert several installments into one for some sounds quite tempting for others is the ultimate lifebuoy. Instead of many short-term obligations that burden our home budget with high monthly repayments, we can have one contract with an installment lower than the sum of previous charges. In addition, the treatment of reducing the number of monthly payments, for many people, will also be a great help in the case of repayment of more than 10 or more loan commitments. This situation happens and it is not difficult to overlook any payment by generating a delay, which will be reported to Retrodatabase.
The lowering of the installment itself will require the extension of the repayment period of at least some of the obligations to be consolidated. And this is the main factor that affects the possibility of reducing the new installment, and not lower the interest rate on the loan, although such is possible by a few points. percent.
If we analyze the consolidation process in the short term, it is a convenient solution. However, if we analyze this in terms of total settlement, it may be that, as a result of extending the loan period, the total amount of costs will be much higher. Why?
Unfortunately, the longer the loan period, the more we will return in the form of interest. Additional costs to be counted on include the commission for granting a new loan and in the case of consolidation loans secured by a mortgage, there are also costs of the real estate valuation and the entry of a mortgage in the land and mortgage register of the real estate.
For borrowers who have problems with maintaining financial liquidity, a consolidation loan is the only solution that will help them in the form of a bigger breath – then the issue of costs usually goes to the background. It should be remembered, however, that we will not receive the second lifeline and the procedure of releasing certain provisions in the home budget should not be a pretext for re-entering debts in other banks, as this will lead to the so-called spiral of credit and that’s the worst thing that can be. Therefore, a reliable responsible credit adviser should not propose a consolidation loan with the choice of funds for the borrower’s various fantasies. He should try to drive him away from this intention. Unfortunately, when the borrower learns that his total installment will be much lower than the previous one, he comes up with various ideas for example, changing the car to a newer one – more expensive with the funds from the chosen amount or thinking about taking the next one. In this way, we will never cure credit, consolidation will only be a temporary measure for a certain period. This product is not intended to help you in an emergency! it should be a recipe for all the evil that has accumulated. Unfortunately, reality is different and many people who have benefited from a consolidation loan, after a few months, reach for more, get in debt and become more and more …
If you have expensive loans, consolidate
Interest rates in recent years have declined sharply. For people who have expensive cash or car loans – consolidation can be a tool that will simplify home finances, but also reduce the total cost of borrowed money. If your creditworthiness allows it, and you have regularly repaid your loans without delay, early repayment of previous loans and replacing them with new loans will be the best solution. Of course, before you decide on this step, however, it is worth to count everything in it, for sure you will be helped by a good credit advisor.
If you have a free property, consolidate under a mortgage, it will be cheaper!
All unsecured loans, such as cash loans or credit cards, are definitely more expensive than mortgage loans. Deciding to exchange from consumer loans for one consolidation loan secured by a mortgage, we can always count on significant savings, which may amount to several percent. This operation will be profitable for people who have made more commitments. The condition to do this is to have an unencumbered real estate that can be used as collateral for a consolidation loan. People who pay off mortgage loans and who already have a bank entry in the land and mortgage register may benefit from consolidation, refinancing the previous liability and paying off other loans, provided that the property value ratio allows for a new exposure in the form of a consolidation loan – LTV (loan to value ).
So, if someone asks whether consolidation pays off? It is difficult to determine unequivocally whether the loan consolidation pays off. A lot depends on the situation, the type of commitments and our financial possibilities. A consolidation loan is spread over many years, has a lower interest rate than a cash loan or credit card, but as it is repaid over a longer period of time, the sum of total costs will be higher. All this should be carefully analyzed on a specific case, for sure a credit counselor will be helpful, who will collect all contractual obligations, verify their interest rates and provide reliable information as to whether it is reasonable to start loans taken earlier. Personally, in my career I met a person who had 24 credits and got lost in their repayments. The only solution was to consolidate all of them into one – then it worked, currently some banks granting a consolidation loan secured on real estate limits such a possibility, for example, to pay 16 liabilities or fewer pieces, thoroughly analyze the customer, at what time previous engagements were granted and whether he did not recently include new ones to repay previous ones or he also asked questions (Retrodatabase report). The bank does not give credit to people who are notorious for debt, that is, they fall into the above-mentioned debt spiral. Therefore, a consolidation loan is not a solution for everyone, but it is certainly worth taking into account depending on the situation in which we are currently.