Debt Consolidation

The debt consolidation option is available for borrowers who have several debt obligations to creditors at the same time. The service is usually provided by large commercial banks that offer customers a wide range of loan products, including cards, consumer loans, and mortgages.  

What is Debt Consolidation?  

The loan consolidation procedure is a special offer from the lender, access to which will help the borrower save money if unforeseen problems arise at the stage of agreeing with the repayment of several existing debts. By consolidating debts, a client of a credit institution combines individual small loans into one large loan. Under the terms of the new agreement, the borrower can receive a reasonable duration of the transaction and a reduced interest rate. Additionally, authorized employees of the financial institution are also reviewing the original payment schedule.  

To get the most out of debt consolidation, you must:  

  1. Explore all the nuances of the loan consolidation procedure provided. Many lenders offer this option only for regular customers who have previously proven themselves well. 
  2. Make a list of debts, taking into account the number of monthly payments and interest rates. 
  3. Study the current payment schedule and the available options for changing it. 
  4. Calculate the optimal amount of regular payments taking into account the current level of income. 
  5. Check your credit history. Lenders will provide access to consolidation only if they are confident that the debt will be repaid. The borrower is also required to have a high credit rating (from 600 points) to obtain a profitable personal loan for subsequent debt consolidation. 
  6. Apply for a revision of credit terms. You will have to contact the lender directly, providing the necessary documents, including information regarding the availability of the source of income. 

Consolidation, along with loan holidays, refinancing and debt restructuring is considered one of the available methods to renegotiate the terms of the original transaction to further reduce the current financial burden on the borrower. Delayed payments, which lead to the accumulation of large debts, significantly impair the level of solvency. The use of the austerity regime will help the borrower to solve the existing problems by significantly reducing costs and changing the parameters of payments by agreement with the lender.  

  Debt Consolidation

Consolidation benefits  

The loan pooling procedure is used to adjust the original terms of multiple transactions. If the borrower is unable to predict his costs and income, consolidation can reduce the risk of late payments. Also, in the long term, a consolidated loan is much easier to pay off than several separate debts.  

Benefits of a debt consolidation program:  

  • Individual planning of an updated debt repayment scheme. 
  • Reducing the size of interest rates. 
  • Reduction of the previously calculated amount of monthly payments. 
  • Changing the parameters of the original contract by mutual agreement of the parties. 
  • Possibility of setting the mode of automatic payments. 
  • Eliminate numerous fees for maintaining individual accounts and executing transactions. 
  • Reducing the risk of confusion when making several successive payments. 
  • Possibility of attracting co-borrowers, security, and guarantors of the transaction. 
  • Serving at one financial institution. Unification of calls and notifications from the lender. 
  • Improving credit rating by reducing the number of regular payments. 

The consolidation procedure is available only after the borrower has submitted an application, which will indicate the justified reasons for obtaining such a service. If the decline insolvency is not the fault of the borrower, the financial institution is more likely to provide a debt consolidation pooling option. Otherwise, the risk of rejection increases significantly, especially when it comes to secured loans because it is much easier for a commercial bank to use a debt collection procedure that is very unpleasant for a client.  

Disadvantages of consolidation  

Despite the rather extensive list of advantages, the consolidation procedure has several notable disadvantages. An ill-considered change in the terms of the agreement often leads only to a deterioration in the financial condition of the borrower, therefore, professionals should be involved in the planning process. The planning of the procedure for consolidation of debts and the subsequent drafting of a new contract is usually carried out by financial managers, who carry out a document check and an interview with the client in advance.  

Disadvantages of a debt consolidation program:  

  • The service is not available in some banks and is usually provided to select customers only. 
  • The borrower is required to prove solvency to receive a new payment schedule. 
  • The presence of commissions and bank charges for the used consolidation services. 
  • The creditor’s claims regarding the provision of security in the form of a pledge or surety. 
  • Tightening the debt pooling plan in the event of a bad credit rating of the borrower. 
  • The inability to get debt refinancing or get a new loan. 
  • The imposition of optional additional services by the lender. 
  • Possible increase in the cost of the loan due to the increase in the duration of the transaction. 

The restrictions are usually in effect until the current debt is fully paid off. If the borrower copes with the imposed financial burden, the current state of his credit history improves, but at a much slower pace than in the case of timely repayment of several debts. The borrower also loses the opportunity to re-apply for consolidation before the expiration of the loan agreement signed by the parties.  

Debt Consolidation Tips  

To get a guaranteed profit from the process of consolidating any debt, it is enough to adhere to extremely simple advice that is often provided by employees of the previously selected financial institution. Changed monthly payments and revised payments allow you to pay off the debt even in the event of serious financial problems faced by the bank’s client.  

Recommendations for a borrower applying for debt consolidation:  

  • You should temporarily refuse to apply for consolidation of debts if the credit rating is lower than that stated by the lender. The client can pay off small debts or past due payments, thereby improving the condition of the credit history or increasing the chances of consolidation approval. 
  • You need to contact a trusted bank or credit union that is actively involved in consolidating debts, receiving positive feedback from clients, and experts for the services provided. 
  • You should not use a secured loan to consolidate unsecured debts. In case of violation of the terms of loan repayment, the lender will apply for forced repayment of obligations by seizure and sale of the collateral, the cost of which will cover the losses. 
  • It is necessary to pay attention to the interest rate and the term (duration) of the debt repayment period. Don’t just focus on calculating your monthly payment. Treasury managers recommend examining the general overpayment rate, which includes fees and penalties. 
  • We’ll have to pay off small loans and refuse to issue related loans. For example, you should repay your credit card immediately, even if the credit card has not expired for the issuer-designated period of the interest-free grace period. This will increase the credibility of the lender. 

Regardless of the advantages and disadvantages of the procedure, the borrower should consider only personal needs, opportunities, and needs during the debt consolidation planning stage. To do this, you will have to assess the level of income, determine priorities, and study the nuances of the procedure for combining several debts.  

When should you consolidate your loans?  

Debt consolidation is the simplest and most affordable option for changing the terms of the deal, created specifically to ease the debt burden. It is designed for borrowers who are faced with unplanned expenses. To pay off debts, a thoughtful combination of loans into one loan with optimal duration and small regular payments is the best suited.  

Loan consolidation can help you save money by:  

  • Reducing the size of regular (monthly, annual, daily, quarterly) payments. 
  • Revision of the payment schedule, taking into account the individual needs of the borrower. 
  • A decrease in the total amount of overpayment while reducing interest rates and the number of payments. 

Some forms of consolidation reduce monthly payments, but they also increase interest payments or overpayments of commissions as a result of increased installments and repayment periods. Ultimately, the borrower will pay more money to service the loan. In some situations, you can only focus on reducing your monthly payment. For example, if a borrower loses his job or becomes seriously ill, the monthly payment will have to be lowered to provide temporary respite.  

It is recommended that the consolidation scheme be agreed with an authorized employee of a commercial bank or credit union involved in the debt consolidation procedure. With a new debt repayment schedule optimized for the needs of the borrower, the client can easily repay previously received loans.