A consolidation loan, i.e. repayment of several debts with one installment, raises many doubts. Is this an effective way to reduce fees conveniently, or rather a cleverly hidden trap that is better to avoid?
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A debt consolidation loan is a loan granted to pay off other debts – including credit card debt, installment, cash, car or housing loans. Therefore, the bank granting the consolidation loan covers our liabilities incurred in other financial institutions by lending us money in the amount corresponding to their sum (or higher if we need an additional financial injection).
In this way, we can combine (i.e. consolidate) several repaid liabilities into one installment, which – mainly due to the longer repayment period of the consolidation loan – will be lower than their monthly sum.
Types of consolidation loans
- Cash consolidation loan – cash borrowed by the bank to repay existing debts. It is a more expensive loan, although simpler to obtain: the decision is made even in a few minutes, and the number of documents required is small (identity cards, proof of earnings and loan agreements concluded so far). Banks granting cash consolidation loans usually do not require additional collateral or guarantors. The condition for obtaining it, however, is adequate creditworthiness, and the consolidation loan itself is also limited to a small amount of consolidated loans – most often to 80 thousand. PLN, less often to 150 thousand zł. Moreover, the loan is granted for a relatively short period, from 6 to a maximum of 8 or 10 years.
- Mortgage consolidation loan – i.e. a consolidation loan that requires collateral in the form of real estate with a free mortgage (belonging to the borrower or a third party guarantor). It is granted even for 30 years, and its maximum amount is much higher than in the case of a cash consolidation loan. It is limited only by the value of mortgage collateral (banks borrow up to 90%). Although in this case banks are more at ease with regard to the applicant’s creditworthiness, the mortgage consolidation loan is more difficult to obtain: applications are reviewed for about a month, and in addition to basic documents, documentation related to real estate as collateral is also required. In addition, various offers impose different requirements on borrowers regarding real estate as collateral for the loan (e.g. minimum usable floor space).
Credit consolidation – costs
Although loan consolidation can seemingly lighten your home budget, we’ll carefully review any costs associated with a consolidation loan before making a decision. We will have to pay, among others:
- preparation fee,
- the amount of interest,
- credit insurance premium,
- commissions for earlier repayment of existing loans (depending on the contracts signed).
When is it worth taking a consolidation loan?
It is worth choosing a consolidation loan above all if the terms of the existing liabilities are extremely unfavorable compared to the current offers of the banks. The interest rate on loans varies from year to year – so it’s good to watch the situation with a vigilant eye and think about consolidating loans on more favorable terms at the right time.
Is a consolidation loan a remedy for financial problems? Not completely. Saving time and money alone can be apparent. Although the possibility of paying off several liabilities closed in a lower installment in one place seems tempting, the consolidation loan itself will most likely be covered by a longer loan period (assuming that it is not only a quick consolidation loan). This means that, in fact, we will pay more in the form of additional interest after consolidation. Therefore, we advise consolidation primarily in the short term – to those borrowers who in the near future anticipate difficulties in settling liabilities.
Financial clutters who have problems with deadlines, not just money, should think carefully before making a decision. The convenience of paying back obligations advertised by banks comes at a price. For those in debt, a consolidation loan will also not be the best solution. After all, problems with debts will not be remedied by another debt, but by another creditor.