A consolidation loan is a special-purpose loan taken out to pay off previous liabilities. We explain when it is worth reaching for a consolidation loan and refute the most common myths associated with it
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A consolidation loan allows you to combine many liabilities into one so that instead of several different installments, you pay only one. It will reduce the monthly installment, but at the same time, it will extend the loan period. We can consolidate virtually all your debts.
Before you take a consolidation loan
Before we consider that a consolidation loan is a good solution in our situation, let’s analyze the structure of our debt. This will allow us to decide which obligations we will payback on the “old principles” and which we intend to combine into one. Obviously, if we are interested in a consolidation loan, we also need to know exactly what debts we have and take the signed loan agreements with us to the bank. We expect the bank to ask us for a repayment schedule or for a certificate of timely payments. It is also worth knowing that … not every bank will agree to internal consolidation. In practice, this may mean that we will have to go to the competition for a consolidation loan.
Types of consolidation loan
Although it may seem that a consolidation loan is a “one” loan, in practice we can find several variants. There are:
- cash consolidation loan – the bank does not require credit collateral from us, but the price for less formalities is a higher interest rate,
- mortgage consolidation loan – as the name implies, the loan is secured by a mortgage, thanks to which the loan has a lower interest rate, it can also be taken for a higher amount.
What we need to take a consolidation loan depends on which type of interest we are interested in. From the bank’s point of view, the most important will be our creditworthiness and how far we’ve served our debt. Interestingly, under the consolidation loan we can apply for a higher amount than the sum of our debts. If a loan for a higher amount is granted to us, we will be able to use the “financial surplus” for any purpose.
Consolidation loan – advantages
One of the most frequently mentioned advantages of a consolidation loan is not only the lower monthly installment, but also the already mentioned possibility of combining several liabilities into one. The consolidation loan facilitates the service of our debts and frees us from the need to remember about each of them. Thanks to it, we will avoid late payments, which in turn translates into our ability and creditworthiness. Combining liabilities is also a good solution when the amount of current installments is too much of a burden on your household budget.
The advantages of a consolidation loan include:
- longer loan period – it is thanks to him that we will pay a lower, monthly installment, but we should take into account the fact that the longer we repay your loan, the higher the costs will be associated with it,
- more favorable repayment terms – this applies especially to the situation in which we transfer our liabilities to another bank, but before we decide to do so, make sure that the consolidation loan on attractive terms will not be offered to us only if we use other financial products of a given bank,
- the option of borrowing a higher amount – thanks to which we can pay our liabilities and the remaining amount of money can be used for any purpose,
- changing the repayment date – this is especially beneficial for people who receive remuneration at the beginning of the month, and I have to pay the installment at the end of it,
- the ability to consolidate all of our liabilities – which one you decide to leave “separate” depends only on us; the only exception here is the situation in which the bank will not agree to internal consolidation.
Consolidation loan – disadvantages
Remember that a consolidation loan is not always worth it. Therefore, before we decide on it, let’s analyze your financial situation and compare the offers available on the market. Let’s look especially at the interest rate and how much the monthly installment would be. Let’s also find out if we can consolidate all our liabilities or only some of them. Before signing the loan agreement, make sure that there are no additional costs associated with consolidation.
In addition, what is the advantage of a consolidation loan may also be a disadvantage. This applies even to the amount of the monthly installment. This one will be lower, but the loan itself will be more expensive for us. What does this mean in practice? The fact that if we had to pay a commission or margin before, there is a risk that this time both fees will also be required from us. Therefore, do not be afraid to negotiate the conditions on which we will be granted a consolidation loan, because the costs associated with it can always be tried to reduce.
A consolidation loan. Summary
It is worth reaching for a consolidation loan when we repay several different liabilities at the same time. Thanks to this, we won’t have to watch the repayment date, and the monthly installment will be reduced. We can consolidate various types of debt, even those incurred in several different banks.
We should remember that credit or loans for the consolidation of liabilities will be granted to us not only by banks, but also by non-bank companies. They approach their clients much less restrictively than banks, and limit formalities to the necessary minimum. Regardless of where we intend to consolidate our commitments, let us pay attention to the costs involved and make sure that such a solution actually pays off. Like other types of liabilities, the consolidation loan should be tailored to your needs, financial capabilities and … portfolio content.