Persons paying two, three or more financial liabilities may consider consolidating them. Thanks to this, instead of paying several installments to several different institutions, they will regulate one in one. How exactly does debt consolidation work and when can it be helpful?
Paying off several liabilities at the same time has obvious disadvantages. The fact that indebted at some point begins to get lost with whom and what the debt is, belongs to those less problematic. The matter becomes serious when it stops dealing with timely payment of installments. If your budget can’t support the total amount of monthly payments, you can lose liquidity and run into financial trouble. One of the solutions that help reduce the risk of such unpleasantness is consolidation of loans and advances.
What is consolidation?
Consolidation involves taking one more loan. The so-called consolidation loan, which is used to pay off all or part of your liabilities. In many respects, this type of product works like any other typical loan: it requires a contract, it bears interest and involves paying installments monthly. The main difference is that the funds obtained thanks to it, in principle, do not affect the borrower’s bank account, but directly on the accounts of the institution in which he has liabilities. In this way, the bank granting the consolidation loan becomes the only creditor of the client.
The key is the fact that the consolidation of loans and credits leads to the extension of the financing period. For example, if a given customer repays a two-year cash loan, an installment laptop and credit card debt, the bank may offer him a consolidation loan, e.g. with a 4-, 5- or 6-year repayment term. Thanks to this, its new monthly installment may be noticeably lower than the sum of all installments of liabilities covered by consolidation. The benefits are obvious for the borrower – debt becomes less of a burden and he can manage his home budget more easily.
When is loan consolidation a good solution?
Financial consolidation may prove to be a good option in several different situations. It should be considered primarily those who already pay off several financial products and would like to reduce the burden of monthly installments. In addition, the solution often works for people who already have some credit or even several loans, but again need an injection of cash. In this case, part of the consolidation loan funds is used to pay off the debt, and some goes directly to the client’s account. This is an interesting option, above all, for those who, due to having high debt or many different liabilities, banks no longer want to grant even a small new loan.
Consolidation is in many cases a helpful solution, and in some – practically the only one that allows you to reduce the risk of financial problems in advance. It should be emphasized, however, that the profitability of this type of operation is a completely separate issue. A consolidation loan involves an extension of the repayment period, which means that interest is charged for a long time. As a result, its total cost is usually higher than the sum of the costs of all consolidated liabilities. One should not forget that this type of loan, like other credit and loan obligations, may not only involve interest, but also additional costs (e.g. commission, repayment insurance or establishing collateral).
How to consolidate loans?
Persons interested in consolidation must be aware of the fact that such an operation cannot cover completely any financial obligations. First of all, it is not always possible in the case of payday loans and non-bank installment loans, as well as all those loans and credits in which there were delays in repayment.
Before granting a consolidation loan, the bank not only analyzes the client’s liabilities, but also his financial position and credit history. To use such a solution, you must go through the standard application assessment process (usually online consolidation is available, i.e. the ability to settle all formalities online). Based on this study, the bank assesses whether to consolidate financially and if so, under what conditions.
Debt consolidation – with a mortgage or cash consolidation loan
It should be emphasized that the consolidation loan itself exists in two variants – cash and mortgage. The latter has a clearly lower interest rate and the possibility of benefiting from a long repayment period (up to 35 years), but requires the borrower to provide security in the form of real estate. It may be a good choice for people with high debts: it will lower installments and allow you to organize your finances, and at the same time be repaid on attractive terms. If the debt is several, several or even tens of thousands of zlotys, usually a better option, and often simply the only one, is a cash consolidation loan.
Cash and mortgage loan consolidation
It is worth emphasizing that it is possible to consolidate cash and mortgage loans in most banks. In this case, the customer uses a mortgage consolidation loan – part of the amount is allocated for the purchase or construction of real estate, and part for repayment of an earlier cash loan. Importantly, however, in such a situation the customer is required to make a correspondingly higher own contribution.
Consolidation of non-bank loans
Non-bank loans are for low amounts, but in the event of financial difficulties and here you need to look for a solution. A person who pays several such liabilities at the same time cannot, if necessary, count on consolidation. If she feels that for some reason she will soon stop dealing with their repayment, she remains to take out a cash loan or a new non-bank loan. This solution will only make sense, however, if the borrowed amount allows you to repay all liabilities and the new installment will be noticeably lower than the sum of previous monthly payments.
Debt consolidation is a way not to solve problems with paying off liabilities, but to reduce the risk of their occurrence. People who are no longer able to pay their installments and are in arrears are unfortunately not getting a consolidation loan. It cannot be used by those who would like to consolidate timely repaid loans and credits, but have already found themselves in a difficult situation (e.g. due to job loss). Such people do not have creditworthiness.
Consolidation of loans for indebted or unreliable borrowers is practically impossible, but this does not mean that they are in a dead end. To be able to get out of financial trouble, they should first of all start talks with the creditor or debt collector. It is worth emphasizing that debt collection companies such as KRUK have a friendly attitude in this respect. In their case, it is the case that the client, together with a trusted specialist, sets new, favorable terms of debt repayment, thanks to which, step by step, without undue sacrifices, he can sort out his financial situation.
When is it better to opt out of debt consolidation?
After learning about the client’s situation and the specifics of his liabilities, the bank offers him a consolidation loan with specific parameters. If it has an unattractive interest rate or high additional fees, it is not worth using the offer. Consolidation is usually not profitable even if it causes the necessity to pay a commission for earlier repayment of individual liabilities (this is particularly common when consolidating a mortgage). In such situations, it is worth continuing the repayment of products on the existing principles or consolidating only those of them for which it is financially advantageous.
You can safely opt out of consolidation if, despite having several loans and credits, their timely settlement does not cause problems.