Major financial institutions refuse to issue unsecured loans not to burden themselves with overdue payments. The risk of non-repayment of loans is closely linked to the lending process, whether it be a long-term mortgage, a consumer loan, or a quick loan. Increasing interest rates allows protecting the lender’s interests. In this case, there is a guarantee of profit even if part of the debt will be recognized as hopeless.
Increase of interest payments leads to a decrease in the borrower’s solvency. Customers who are not financially conscious can get into a debt hole, and only a handful of them can get out of it. Specialized services provided by lenders in order to reduce debt and save money are capable of helping the borrower to cope with debts. We are talking about debt consolidation, restructuring, and refinancing. The initiator of each procedure may be the client or the financial institution itself.
What is debt consolidation?
Borrowers who take multiple loans at the same time must provide the conditions for timely repayment of all debt obligations. Consolidation or credit integration is used to simplify this procedure. Instead of several small payments, which are charged by the banks, the client completes one regular transaction.
Pros and cons of consolidating debt:
- Change in terms of initial transactions.
- Reducing the number of delays.
- Reducing the cost of loan servicing, including the rejection of numerous commissions.
- Ability to unify the mandatory payments.
- Simplification of the process of regular transactions.
- Improved credit history and credit rating.
In the process of exchanging several debts for a consolidated loan, you can also amend the contractual relationship between the lender and the borrower. Financial institutions are ready to cooperate with the borrower, so you should take advantage of the situation and individually develop a payment calendar. Borrowers even get the opportunity to agree with the lender on installment payments. This option is ideal for clients with seasonal earnings and temporary financial difficulties.
Sometimes, consolidating debt is provided as a paid service. The customer pays for such a service by paying interest rates. For example, debt consolidation uses a higher rate or a maximum commission payment. Such a method is only suitable for the consolidation of loans that have virtually identical repayment terms. Paying a mortgage on the terms of an express loan is simply unprofitable for the borrower.
Cost reduction through debt consolidation
Consolidation will help you reduce the cost of debt repayment. You will have to repay the loan anyway, but after merging small debts into one large transaction, the commission payments will decrease significantly. Some lenders also offer reduced interest rate payments.
There are two methods of how to consolidate debt and save money:
1.Managing interest rate risk by switching to an affordable fixed-rate loan.
2.Changing the original temporary debt repayment profile, including the introduction of a grace period and the creation of a payment schedule, taking into account the borrower’s financial capabilities.
The consolidation process will save the client from the numerous loan servicing fees that are usually charged after completing specific transactions. The debt management process is further simplified. Instead of making payments to the accounts of multiple lenders, borrowers are required to make one consolidated payment on a regular basis.
A customer who is bad at banking is less likely to miss another payment. As practice shows, small delays of up to 7 days are often caused by banal inattention of payers who confuse the dates of repayment of the loans received. As a result, you can get access to another benefit of consolidation – improvement of your credit rating.
Debt consolidation process
There are many methods of how to consolidate debt, so the choice of how to combine debts should be made depending on the current situation. We recommend you to clarify specific details in consultation with the financial manager of the chosen credit institution, who will help you develop the optimal program for consolidation.
Stages of debt consolidation:
- Study information on the existing debt obligations.
- Choosing the best way of debt consolidation.
- Approval of the terms of the transaction with the staff of the financial institution.
- Drawing up an updated schedule for debt repayment.
- Signing of a debt consolidation agreement.
In the future, the process of debt repayment is made, taking into account the newly agreed terms. Consolidation can take many forms, including personal loan, credit line, bank card, and secured or unsecured loan. Regardless of the strategy suitable for your client, the essence of consolidation remains the same. The procedure will allow you to combine most of the borrower’s debts to save money and simplify the loan repayment.
The specifics of how to save money and pay off debt depend on the type of debt the borrowers are facing. For example, if there is more than one credit card debt with a higher interest rate, the customer may use consolidation services to unite them. In the future, the borrower can focus on the repayment of the combined loan by making regular payments. Ideally, the borrower can significantly reduce the interest rate after agreeing more favorable terms for paying off the debt.
How much can you save by consolidating?
In the process of debt consolidation, you can save up to 40% of your total debt. By combining the loans, the lender has a unique opportunity to refuse additional payments. In this case, borrowers may additionally attract some services or refuse the ones that can increase the financial burden. Savings in the process of debt consolidation depend on the agreement.
Some institutions provide ways to save money and get out of debt only as a paid service. In this case, the borrower will have to pay a fine or a commission. Additionally, financial institution employees may require payment for contract preparation and consulting. You should discuss the cost of consolidation before agreeing on the terms of future cooperation.
Consolidation is a simple, affordable, and profitable way to adjust the terms of the transaction. The borrower may refuse from several small payments in favor of a large monthly payment. By eliminating transaction fees, reducing interest rates, and changing the frequency of payments, the borrower will have access to the most comfortable terms of cooperation.