Consolidation Loans – What is Worth Knowing?
April 2, 2019
Consolidation allows you to combine various loans and credits into one major commitment with one smaller usually monthly installment. The ranking of consolidation loans will show in which bank the credit liability can be drawn most preferably.
Consolidation, or merger, in the context of lending means the conversion of several other obligations into one larger one, with a prolonged period of lending. The consolidation loan enables the borrower’s financial situation to be sorted out and the monthly credit burden resulting from the need to repay principal and interest installments on specific dates. The ranking of consolidation loans will show what credit the customer can count on and whether it will be profitable for him to consolidate.
What is consolidation about?
Consolidation loans can be found in the banks’ offers. They consist in the fact that the bank, after analyzing the creditworthiness of the client and his existing credit or loan agreements, can offer him an individual consolidation loan. He repays his previous obligations on behalf of his client and at the same time calculates the principal and interest installment which the borrower will pay to him according to the repayment schedule of the consolidation loan.
It happens that banks in which customers have loans or borrowings are charged certain fees or commissions for early repayment of liabilities. In such a situation, it becomes an additional cost of the consolidation loan. It is possible that it will be paid by the consolidating bank, but it can also be transferred directly to its client. This should be taken into account when calculating the costs of consolidation loans.
Two types of consolidation loans can usually be distinguished:
- mortgage consolidation loan,
- cash consolidation loan.
A characteristic feature of the mortgage consolidation loan is that it obliges the borrower to establish a mortgage security for the benefit of the bank with an entry in the mortgage. This solid security means that lending institutions are willing to include housing loans, even those in a high amount, into the consolidation, and at the same time offer the client very good conditions.
What obligations are subject to consolidation?
In offers for consolidation loans of individual banks that have such financial products in their assortment, we should find accurate information on which loans and borrowings can be included in consolidation. It can be for example:
- a cash loan
- installment loan;
- a revolving loan in a personal account;
- credit card;
- car loan;
- mortgage, renovation, for housing and similar purposes ;
- cash loan, also non-bank loan.
The client may try to consolidate all loan and loan liabilities he has and the bank will respond to the loan application, whether he will be able to repay the existing loans and borrowings.
Is consolidation profitable?
There is no single answer to this question, it all depends on the customer’s credit situation and what kind of consolidation loan offer the bank will present to him. In many cases, consolidation is a facilitation for customers, especially those who are starting to get lost in repaying capital and interest installments on a timely basis in various schedules.
It is also a solution for borrowers who know that in the near future they will have higher expenses or will reduce their incomes, which could threaten the failure to repay the required installments on time. If at the time of applying for a consolidation loan at the customer there is no overdue debt, i.e. he paid installments regularly, he has a chance to consolidate.
However, before this happens, you need to check whether the costs of consolidation will outweigh the benefits associated with taking out this loan. Most often these costs include:
- commission for joining the commitment,
- the valuation of the real estate constituting the repayment security,
- costs of establishing a mortgage in the land and mortgage register,
- preparation fee,
- loan interest rate.
It is worth saying that extending the lending period, which we usually deal with in the case of consolidation and lowering the monthly installment, causes an increase in annual credit costs. So if we are able to pay a higher installment in a shorter period, we should decide to not incur too high fees associated with consolidation.