Consolidation of debts is advertised as a golden mean that solves a lot of problems resulting from being burdened with loans in several different places. While this solution has obvious advantages, there are also some negative aspects that should also be considered when deciding to consolidate debts.
Goal of debt consolidation
The goal of debt consolidation is to combine all debts into one, which theoretically facilitates control and repayment.
A consolidation loan can be used to repay a housing loan, repay credit limits, mortgage loans, installment loans, cash loans, car loans, and all kinds of consumer loans. As the advantages of combining all arrears in one debt, one repayment period, one installment, a lower interest rate on the consolidation loan, a long repayment period, a lower installment amount than the sum of installments paid earlier.
When deciding on consolidation of debt, it is necessary to remember about the disadvantages of such a solution. The first issue is that a consolidation loan can only be granted to certain persons. It is necessary to creditworthiness, and the person “drowning in debt” will not get another loan. For a consolidation loan to be really cheap, the bank will usually look for adequate security. And here comes another problem, because not every debtor has assets that will be sufficient to be used as collateral for a consolidation loan. As a result, it may happen that even if you manage to borrow a sufficiently large amount to repay other liabilities, the repayment of the new loan will not be so cheap that it could significantly improve the financial situation.
One should also remember the costs associated with debt consolidation. You need to calculate all the commissions and fees associated with the new loan carefully. In the calculation, it is necessary to take into account not only bank commissions, but also fees for the court that will enter the mortgage, or an appraiser who will make a valuation of the property constituting the loan collateral. The sum of all costs can reach even several percent of the value of a new loan. And because consolidation loans are not low, so as a result we may be surprised by the need to pay even a dozen or so thousand zlotys for costs that we did not take into account. A person who exchanges many credits for one, must take into account the expense and just sit in front of a piece of paper and count whether reducing the monthly cost of consolidation loan will compensate for this initial expense. It may turn out that the whole procedure is completely unprofitable.
It will be in your best interest if you compare the offer of several banks before making the final decision. In order to make a good choice, it is enough to obtain detailed information on all expenses related to undertaking a new commitment and basic knowledge of mathematics.