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Credit consolidation – definition, pros and cons
Credit consolidation “lainojen yhdistäminen” is the consolidation of several loans under a single contract. Thus, the main prerequisite for implementing the procedure is the registration of two or more loans. If the merger is performed in re-crediting, the original debts may be formed in different institutions.
As a rule, refinancing allows you to combine up to five quick, consumer, target, and secured loans. In addition, you can consolidate debts incurred due to receiving an overdraft, credit lines, and bank cards.
When should I perform the consolidation?
The consolidation procedure involves combining several loans to repay the total amount of debt by the borrower. Banking institutions provide the option during complex refinancing programs, but loan mergers can also be ordered as a separate service aimed at changing the initial conditions of several financial arrangements.
To manage the obligations under the loan agreement without the risk of late payments, it is necessary to manage the debt properly. Repayment of the debt is a difficult task if the borrower simultaneously applies for several loans. When servicing the resulting obligations threatens with fines and other sanctions, the logical solution is to review the original agreements and then merge the loans.
Basis of the combining loans:
- The occurrence of temporary financial difficulties due to decrease insolvency.
- Systematic errors in making payments due to confusion with contributions.
- Reduction of the total amount of overpayments due to the revision of the number of rates and commissions.
- The possibility of significantly improving the credit conditions and optimizing the level of financial burden.
If the borrower needs to pay off several debts at the same time, there may be unpleasant situations associated with confusion at the stage of making regular payments. For example, within a month, you need to deposit different amounts to the current accounts of creditors. Having mixed up the fees, the client will make a banal mistake. As a result, an overpayment is formed for one of the loans, and for the rest – overdue payments with penalties.
Advantages of consolidation
Combining existing loans is recommended to be considered one of the methods of reviewing the terms of problematic agreements or transactions, for which violations may occur in the near future due to overdue payments. Nevertheless, it is allowed to perform consolidation to simplify the procedure for paying off existing debts that are not threatened with a problem status.
- Optimization of monthly expenses for debt coverage.
- Downward revision of the base interest rate.
- Simplification of the debt management procedure.
- The ability to close multiple transactions by refinancing.
- Maintaining an impeccable reputation and excellent credit history.
- Reducing the risk of conflict situations with the lender.
- Protection from compulsory recovery by court decision.
- Maintaining a comfortable payment schedule without overdue payments.
The main advantages of consolidation are improved lending conditions and, of course, increased chances of obtaining a one-time deferred payment. Instead of several payments during the reporting period, the payer is obliged to make a single contribution.
If the consolidation is carried out in conjunction with the rollover, the amount of monthly payments is reduced together with the level of the financial burden.
Disadvantages of consolidation
There are several rules that the parties should follow when consolidating to avoid problems associated with the revision of the terms of transactions. For example, the extension of the maturity period brings a positive result only by reducing the regular payment load, while the total amount of payments under the transaction increases.
If the debtor cannot afford large monthly installments, combining transactions will make it easier to meet financial obligations and maintain a monthly budget. However, the final cost of the new loan will increase significantly due to an increase in the number of commission deductions.
