Sometimes you can get into a situation where you are not able to repay the original loan and consider using refinancing. By being in such a situation and under a great deal of time pressure, you also reach for a disadvantageous loan that only makes things worse.
What is refinancing
The first question we should ask about refinancing is whether it pays off and what does refinancing actually mean? Refinancing or refinancing a loan is a professional term for a very simple step – replacing one or more disadvantageous loans with a more favorable one. It is possible to refinance virtually all types of loans – credit card debt, overdraft, consumer credit or leasing. However, mortgage loans are the most refinancing. Low interest rates and lower repayments may seem tempting, but may also be disadvantageous.
It always depends on several factors. First of all, the characteristics of the loan (s) that we want to repay should be taken into account. We have to look at how much we borrowed, how much we repay, how much interest we have, how much we still have to pay, and especially how much it will cost us. Also important is information on the conditions for early repayment of an existing loan. Ideally, we have the option of paying off the residual portion without the early repayment fee.
The second factor in the decision-making process is the refinancing credit conditions. Here again, the most important indicator is the total amount of installments to be paid. Therefore, it is very important to take into account the total price we pay with the possible fees and, ultimately, how much money we save.
For some, another factor, such as the amount of the installment, may be decisive. If we are unable to repay the loan, it may be possible for us to refinance with a lower repayment loan, but we will not save it in the end. It’s just up to us. But it is important that we take a refinancing loan for a reason that is important to us and not because we have been persuaded by the marketing activities of a financial company.
When is the refinancing loan not beneficial?
Sometimes a person can get into a situation where the original loan is not able to repay and is considering using refinancing to facilitate the situation. Often, people in such a situation are under a great deal of time pressure and reach for a disadvantageous loan that only makes their situation worse. If we have a bank loan and we know that we will have a problem with the repayment, we will not move right after the first bid. It is really important that we do not get even worse than we were before refinancing.
What is consolidation?
In Europe, we are still among the least indebted people. On the other hand, there is also a growing interest in loans. Since 2000, the volume of loans has grown up to 16-fold. However, there is also a growing number of people who have more loans. Many times because they wanted to repay older debts. This creates a vicious circle. One just pays and pays, but debts are just kicking. That is why consolidation is the solution and can result in savings. Loan consolidation is a complex term for a very simple thing – the exchange of multiple loans for one new one. In Slovak, we are also talking about the merger of loans.
When is it good to use credit consolidation?
Under ideal circumstances, no one would need consolidation. But reality is a little different. Many people will often succumb to the desire for new electronics or exotic holidays and will not just take advantage of the most advantageous loan. Everyone makes mistakes at times.
A credit card debt or an allowed account overdraft will be added to the consumer credit. Loan repayment over time will draw off the family budget unbearably much. Moreover, tracking multiple loans may not be easy. In such a situation, it is fairly easy for us to forget about an installment. However, we can be sure that this will not happen to the creditor. Paying several loans at once brings not only financial problems – it also takes valuable time. We have to deal with several companies that apply different rules, fees, fines and so on. Ultimately, this will create one great chaos. In particular, banks and non-bank companies always make use of this mess. We can count on that.
For consolidation, people decide for two main reasons
– save on a monthly installment
– simplify the entire repayment process
The most important aspect of loans is their financial side. Most people go after consolidation to simply lighten their wallet. There is no complicated trick when consolidating. By consolidating loans, we achieve a lower monthly installment based on simple principles.
Interest Rate Reduction
The essence is very simple. Consolidation credit is advantageous if it is burdened with a lower interest rate than all existing loans together. Obviously disadvantageous loans consolidate the simplest and most advantageous. Very disadvantageous loans, which are most often consolidated, are credit cards and permitted overdrafts. Both forms of borrowing are subject to extremely high interest rates. In addition, there are various fees associated with credit cards, where many people do not know each other.
When consolidating loans, we have two ways to consolidate
– consolidation without real estate security
– consolidation with real estate security
Consolidation loans without real estate collateral will naturally be more expensive. If we really want to consolidate loans really, we will secure a consolidated loan with real estate. The loan provider will be able to offer us much better interest. However, we must realize that we are exposing our property to the risk of a real estate property. This step needs to be approached with care. Definitely should not be used by people who are in a desperate situation because of loans.
Main benefits of consolidation
1. Consolidation leads to a decrease in interest rates and a reduction in monthly payments
This is the main motivation for most people.
2. Consolidation saves credit management time
Paying off one loan at a time is far easier than repaying four loans in time. The chance of forgetting something is so much smaller.
3. After consolidation, there is only one creditor
In short: agreeing with one lender is many times easier than agreeing with two. Not to mention more creditors. The debtor’s negotiating position for one creditor is simply far better. One creditor equals one contract. One conditions, fees, fines and deadlines.
4. Loans can be consolidated with real estate collateral
Securing a real estate loan is the easiest way to get a lower interest rate. However, setting up a property needs to be well thought out. Later financial problems can lead to a loss of property.
5. The consolidation loan may be drawn above the refinanced amount
Thus, the consolidation loan may not only be the sum of all consolidated loans. We can always enjoy something extra for your own consumption.
6. Lower monthly borrowing fees
Most loans are linked to monthly charges. The more borrowing you have, the more you pay. You only have one loan after consolidation. You only pay one fee.
At first glance, consolidating loans may seem to be a magic wand that can be used to get everyone out of problems. But the reality is different. Many people are getting into problems with repaying loans. It happens. Life is unstable and people naturally make mistakes. Most people consolidate loans can help. But not nearly all. If we are interested in consolidation, we will still have to be able to get a new loan.