What does consolidating debts mean?
The sudden loss of income or an increase in interest rates can lead to situations of defaulting on loan payments. Consolidating loans is an option that can provide immediate savings. How does it work?
What is a consolidated credit?
A consolidated credit is a financing that allows combining several credits that you have in hand.
As a rule, banks consolidate credits when contracts are for home loans, consumer loans, and credit cards. For example, if you have a mortgage, a car loan, and a credit card, you can consolidate all three.
If you do a credit consolidation only with consumer credits, banks propose a maximum repayment period of 7 years with higher interest rates. But if you have a property to use as collateral, meaning a mortgage to consolidate with others, the repayment term may be longer.
What is the purpose of consolidating credits?
The goal of combining credits is to pay a single installment for multiple loans. The amount paid for all becomes lower, but the loan term substantially extends.
If you are having trouble paying your loans, consolidated credit could be a solution to avoid missing any payments.
What are the advantages and disadvantages of consolidated credit?
In terms of advantages, the risk of default on different credits decreases, as it facilitates switching to paying a single installment instead of several. The probability of missing a single payment is lower.
Despite the interest rates being more attractive in the short term, by increasing the repayment period, you end up paying more interest on long-term credits. In other words, a consolidated credit allows for immediate monthly relief, but may not be as beneficial in the future.
As disadvantages of consolidated credit, you must still be aware that proceeding with this credit implies first amortizing debts. This can have costs with early repayment fees.
In the case of mortgage credit, this commission can range up to 0.5% of the amortized value if it has a variable interest rate, and up to 2% if it is a fixed interest rate. Regarding consumer credits, if the interest rate is variable, there are no penalties, but if it is fixed, it can go up to 0.5% of the amortized value, or up to 0.25% if it is the last year of the contract.
In addition, consolidating credits may also involve legal costs related to the new credit contract (fees and stamp duty).
Consider other options before consolidating credit.
Before proceeding with a consolidated credit, consider less drastic options first. For example, if your goal is to lower the value of credit installments, you can talk to your bank to renegotiate conditions.
In order to lower the installment of the credit, the bank may propose new conditions such as a discount on the spread in exchange for subscribing to other products. Imagine that you have a spread of 1.2% on your home loan. The bank can propose to lower the rate to 1% if you take out a credit card. This, in practice, means that you will pay less for the monthly financing.
Another solution that can provide you with a lower credit installment is transferring the financing to another bank. You can do this with any type of credit. However, it is more common to do so with mortgage credit. If you are dissatisfied with the conditions of your credit at the bank where you have taken it out, even after renegotiating, you can request proposals from other entities based on your property and outstanding capital. The goal is to obtain more favorable conditions that decrease the amount you pay for credit each month.
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