A consolidation loan is a product that allows you to combine several previously incurred commitments into one under new conditions. How does it look in practice? You exchange receivables in several financial institutions for one consolidation loan. You pay one installment to the bank that granted you such a loan and it repays all loans or credits you have taken.

Very often, the consolidation loan also reduces the installment (the total installment is lower than the sum of the existing installments), partly by reducing the debt service costs, and partly by changing (extending) the loan period.

 

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A payday loan consolidation at https://paydayloanconsolidation.net/ is primarily a solution for people who pay off several different debts, which causes logistical problems with servicing loans (the need to remember about dates, installments, etc.).

If you want to use a consolidation loan, however, you must have adequate creditworthiness – the higher it is, the greater the chance of receiving favorable repayment terms. Unfortunately, this type of loan will not be a good choice if you pay liabilities in parabanks or other institutions offering payday loans. Why? B cups do not want to consolidate this type of commitment.

NOTE: If you have good credit standing, you can get a consolidation loan for an amount higher than your actual debt, and use the excess for any purpose.

 

What to look for when deciding on a consolidation loan

What to look for when deciding on a consolidation loan

First of all, if you want to apply for a consolidation loan, you must already have some obligations. It can be said that this type of loan is a loan for the indebted.

What is very important when choosing a consolidation loan is what types of loans you can consolidate. Depending on the bank, these can be:

  • cash loans,
  • car loans,
  • revolving loans,
  • credit cards,
  • mortgages,
  • installment loans.

If you want to take advantage of a given bank’s offer, you should make sure that the institution allows you to consolidate the liabilities you have – not everyone wants to, for example, consolidate mortgage loans (the bank’s margin on this type of loan is the lowest).

First of all, you should check whether the cost of the loan after consolidation compared to the previous ones will be lower. You should pay attention to both the amount of the monthly installment and the total cost of the loan. Unfortunately, even with a lower margin, a longer loan period can make the total cost higher. Also remember not to take a loan for a longer period than we need – each additional month of debt is an additional cost for you. If you take a long-term consolidation loan, see also the terms of early repayment.

 

Consolidation loan – how to calculate the installment

Consolidation loan - how to calculate the installment

There are several factors to consider when calculating your consolidated installment, including:

  • the sum of credits,
  • interest rate,
  • type of commitment,
  • bank commission,
  • repayment period,
  • creditworthiness.

In order to show how consolidation will affect the size of your installment and the amount of credit, the following example has been prepared. The following assumptions were made for the calculations:

  1. The borrower repays 2 different loans – cash and car.
  2. The sum of installments exceeds its monthly financial capabilities.
  3. The statement does not include the commission charged by the bank.
  4. Both liabilities are repaid in equal monthly installments and do not have insurance.

As the tables show, if you decide on a consolidation loan, the bank will offer you a lower installment and a longer loan period. It should be remembered, however, that in this case the amount to be repaid will be definitely higher than previous commitments. In the case of the first proposal, the borrower has $ 3,305.6 more to pay, and in the second option – $ 14 419.2.

 

Pros and cons of a consolidation loan

Pros and cons of a consolidation loan

Advantages of a consolidation loan

The basic advantages include primarily the reduction of debt servicing costs. Very often, the bank, in order to convince a customer with credit in a competitive bank, offers more favorable conditions. In addition, a customer who consolidates debt is valuable to the bank because its debt is large (larger than for individual loans). Therefore, having several loans, you are in a better negotiating position and often get an offer with a favorable margin.

What is important is also the debt service itself. You don’t have to remember about several repayment dates. In the case of repayment problems, you do not need to contact several institutions – you only need one – it is undoubtedly a great convenience for the borrower.

It is also worth mentioning the possibility of consolidating loans, indicating the property as collateral. If earlier loans were cash, consumer, then their interest rate was certainly high. If you consolidate them for a mortgage, you can get a much better deal.

Importantly, with mortgages, banks are doing everything to simplify the procedure as much as possible. They repay their liabilities in other banks themselves, help with formalities and so on – all to encourage the client to leave the competition and come to them.

A consolidation loan is also a good opportunity for people who are afraid that in the future they may have a problem with servicing their current debt. Thanks to consolidation, they have the opportunity to change the loan terms (for example, extend the loan term – which automatically reduces the loan installment). However, extending the loan period means that the total cost of the loan increases significantly.

 

Disadvantages of a consolidation loan

Unfortunately, the consolidation loan also has its drawbacks. First of all, they include extending the loan period, which increases the cost of the loan.

Mortgage holders should be especially careful with consolidation loans. Loans secured by real estate usually have the best condition (the lowest margins of the bank), therefore the use of consolidation products for this type of loan is not always beneficial for the customer.

The disadvantages include the formalities and charges y to be borne. The consolidation loan, like other loans, requires the presentation of relevant documents and certificates. As with other loans, it is sometimes necessary to pay a commission. An important factor affecting the lower profitability of consolidation loans is also the fact that sometimes you have to pay a commission for early repayment of the obligation – the institution that granted the loan.

In many cases – especially if you have consumer loans – using consolidation loans can reduce the cost of servicing your debt. There is also no doubt that for many people this type of loan is salvation against paying too large installments when they have temporary financial problems – often consolidations extend the repayment period.

A consolidation loan is undoubtedly a product worth knowing. However, as in the case of other banking products, you should read the proposal carefully and calculate what pays off for us not to overpay later.

 

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