Free access to lending programs leads to the fact that people who do not differ in financial literacy or who are faced with force majeure circumstances become owners of several loans at once. Banks and non-banking institutions issue loans with different repayment terms. Not only loan sizes or repayment terms may differ, but also interest rates.
An increase in the payment burden due to the simultaneous execution of several loans provokes untimely debt repayment due to banal forgetfulness or temporary financial difficulties. To avoid late payments, while maintaining a positive credit history, borrowers may take advantage of a debt consolidation service.
What is debt consolidation?
Loan consolidation is a set of banking measures to combine several loans into one. The ultimate goal of using consolidation is to reduce the burden on the payer.
Important! With debt consolidation, the debtor undertakes to make one monthly payment to pay off the debt instead of several small payments.
Loan consolidation banks can offer:
- Low interest rates;
- Flexible payment requirements;
- Prolongation of maturity;
- Decrease in monthly payments;
- Revision of the loan terms.
How are loans consolidated?
Debt consolidation is not always present in the list of products provided by financial institutions. This method of revising loan conditions is popular in the SUA and Europe. Sometimes third-party companies are involved in debt consolidation.
Domestic banks usually use loan consolidation as part of the refinancing procedure. This method of debt management allows you to amend the repayment terms of several loans, uniting them into one loan with a new repayment schedule.
Important! Debt consolidation is available to consumers who are at least 18, have a good credit history and a source of steady income. The bank has the right to demand the borrower’s ID, proof of income and employment.
Types of debt consolidation loans
You can consolidate debts that have formed as a result of the use of credit cards, consumer loans or payday loans. As a rule, a merger of no more than five existing obligations is allowed. The parties agree on the terms of the new deal individually without involving the original creditors.
Types of debt consolidation loans:
- Secured loans – imply the availability of collateral. The borrower must provide liquid property as collateral in order to consolidate the debt;
- Unsecured loans – provided without collateral and resemble a consumer loan for any need.
As a separate service, consolidation on favorable terms can be offered by a bank that works with a client under several lending programs.
For example, if a consumer loan and a credit card are issued at the same time at a financial institution, debts on these banking products can be combined.
Preparing for debt consolidation
Before agreeing to an offer to consolidate debt or deciding on such a step, you need to carefully prepare for it. Careless use of banking services can significantly worsen the financial situation.
Advice for borrowers who plan to combine several loans into one:
- Assess the change in financial burden indicators due to the consolidation of debts. The data obtained as a result of the calculations must be compared with information on the total costs that will arise without the merger of loans. Sometimes it is more profitable to repay several loans, for example, if the term of one of the transactions is nearing the end;
- If there are several offers from different lenders, choose the most beneficial option, taking into account the loan amount, interest rates, term and date of monthly payments. You must pay special attention to additional services and the conditions for imposing penalties;
- Make sure that the chosen consolidation option is not only economically viable but also affordable in terms of processing speed, collection of documents, additional fees and quality of service;
- Check with the financial institution the list of required documents, and then collect them as soon as possible. The deadlines for submitting documents will have to be clarified on the website or with the lender’s employees.
The decision to consolidate loans should be made taking into account financial capabilities and based on information about the current financial situation. In order not to end up in an even deeper debt hole, the borrower needs to think about the risks that he or she will have to face after consolidation.
Before submitting an application, you need to consider:
- Consolidation feasibility. The new loan should be more profitable than the previous loans;
- Requirements for collateral, if any;
- Lending terms such as rates, fees, commissions and monthly payments;
- Information about the bank and the loan pooling program chosen by the borrower;
- The amount of additional fees in case the consolidation option is paid.
A borrower who decides to resort to the help of a third-party institution must study the reviews and check the credibility ratings of the lender.
Important! It is better not to get involved with organizations that have a large number of negative reviews from experts and consumers. Reputable financial institutions should be involved in cooperation.
How to combine several loans into one: instructions
After completing the preparatory work, the borrower can proceed directly to the consolidation. The procedure begins with the filing of an application based on the sample of the selected lender. In the application, you must indicate your ID, information about existing loans and a phone number for feedback. Some lenders also ask you to explain the reason for seeking help.
Standard consolidation algorithm:
- Search for an attractive loan product, study the conditions and prepare for an application;
- Submit an application and provide the collected documents to the selected credit institution;
- The lender considers the request, makes a decision and notifies the client about further actions;
- Coordinate all the nuances of the transaction and sign a loan refinancing agreement with consolidation;
- The lender issues funds to pay off previous debts.
Debt consolidation: reasons for a refusal
Common reasons for rejection of consolidation requests:
- Insufficient income level;
- Age restrictions;
- Bad credit history;
- Misleading the creditor;
- Errors when filling out the application;
- Re-consolidation of loans.
To increase the likelihood that your request will be approved, you should pay attention to the reasons for the rejection. As a rule, applications are rejected due to typos or non-compliance of the client with the bank’s requirements. As soon as you correct the mistakes, you may resubmit the application.
Important! Consolidation will be denied to borrowers who previously carried out refinancing or restructuring under the agreement. A good reason for rejecting a request is also the concealment of information important to the lender.
Pros and cons of debt consolidation
A competently executed loan consolidation will reduce the payment burden on the borrower. Simplifying the loan repayment process along with changing conditions to more favorable ones helps to reduce the likelihood of late payments. In the final account, the borrower’s credit score will increase.
Advantages:
- Making monthly payments on a single loan on time is easier than fulfilling obligations on several loans at the same time;
- By taking advantage of the option to reduce the amount of monthly payments, a client with a small income can significantly reduce recurring expenses;
- The interest rate on a consolidated loan is lower than the total monthly payments on small loans;
- Release from past obligations of the borrower in some cases is accompanied by a partial write-off of debts;
- Reducing the total cost of repaying loans will help avoid late payments while maintaining an impeccable reputation.
Loan consolidation has both positive and undesirable consequences. To reduce the risk of force majeure circumstances provoked by inappropriate consolidation of loans, you should carefully calculate future costs, taking into account even the smallest nuances of the procedure.
Disadvantages:
- Calculating the potential benefit or loss of a loan combination requires professional skill;
- Negotiating with representatives of credit institutions and collecting documents takes time;
- Borrowers face associated costs, such as paying for various certificates;
- There is a risk of fraud and default on the part of unscrupulous intermediary companies.
It should be noted that funds are not handed over to the borrower in the course of consolidation. The bank transfers the agreed amount to the accounts of former creditors in order to avoid fraud on the part of clients. In turn, the loan agreement does not provide for the payment of compensation for early fulfillment of obligations.
Important! Former lenders are not entitled to fine borrowers who choose to consolidate debts. By law, creditors are prohibited from hindering early loan repayment.
Conclusion
Any change in the terms of the original loan entails risks. Consolidation is no exception. However, a competently executed consolidation of loans will allow you to find a real way out of a difficult financial situation. The prevalence of advantages over disadvantages contributes to the growth of the popularity of this banking service among the population. Debt consolidation will allow borrowers to get rid of problem liabilities with minimal losses and maintain an impeccable reputation.