Czym jest konsolidacja kredytów

What is loan consolidation? What are its advantages and disadvantages?

Credit consolidation can be an extremely helpful tool in the fight against excessive financial burdens or overwhelming installments on multiple loans. By consolidating obligations, we can reduce monthly installments and gain space for new financial products. Let’s find out exactly what loan consolidation is, when it’s worth using it and what to look out for.

Many loans, many problems

The introduction may be rather laconic, but this is more or less how it looks to most borrowers, who have taken out different obligations for different purposes. A home loan, a car loan, a cash loan, an installment loan, a vacation loan, a credit card. So many monthly charges can make one’s head spin, and remembering them is quite a challenge.

Frequent borrowing of various loans or credits can, after some time, result in problems with repayment of one or even many of them. As we have written before, this is an easy way to fall into a debt spiral, from which it can be extremely difficult to get out.

Taking out a home loan and then taking out a loan to furnish it is a “method to get your own four walls” that is quite often practiced in Poland. The snag is that the housing loan itself is a really big challenge, and when we add a cash loan (for renovation), in a few months we may find that we are unable to pay any of the installments regularly. Thus, quite often we reach for another financial product with which we want to patch up the emerging hole, but we only get into more financial trouble.

In the meantime, quite often there is also the need to buy a car, or even some small installment loans. This can really end disastrously. What to do in such a situation? How to reduce the number of liabilities, when we have already decided on them, and the installment loans overwhelm us? Consolidation will help!

What is credit consolidation?

Consolidation, or in this case loan consolid ation, is nothing more than combining multiple obligations into one and paying only one monthly installment. Admittedly, consolidation does not work, like a hub, combining all the loans in different institutions and “reallocating” the money we pay into the accounts of different banks, but it certainly allows you to “combine” them and pay only one installment. How. We already explain.

Credit consolidation consists in the fact that the financial institution gives us one larger loan, the funds from which are used primarily to pay off obligations incurred at other banks and loan companies. As a result, the borrower becomes a debtor to only one financial institution and has only one loan to repay, with one monthly installment.

IMPORTANT: Most banks provide a consolidation loan only for the repayment of financial obligations incurred only in other banks, but increasingly you can also find offers to consolidate also momentary loans.

Advantages of credit consolidation

The undoubted advantage of loan consolidation, or interchangeably consolidation loan, as this financial product is called, is to minimize the number of financial obligations you have. Paying off several loans, as mentioned earlier, can be quite a hassle. This is one of the key factors why you should consider consolidation.

advantages of loan consolidation
Advantages of loan consolidation Finance and Accounting. Photo: Sturti via Canva

Another will be the ability to reduce the installment of loans. How is this possible? By extending the repayment of the consolidation loan! If you have a car loan for five years, a cash loan for three years, and an installment loan for two years, by choosing consolidation and extending the repayment period to, say, seven years, the loan installment will be much lower than for loans with shorter repayment terms.

IMPORTANT: Extending the repayment term, i.e., extending the loan, will increase interest costs, which must be taken into account when consolidating. A loan stretched over time will be more expensive than a loan with a shorter repayment term.

Another advantage of loan consolidation is the possibility of receiving better financial terms. Many banks, in order to encourage new customers, and consolidation is one of these incentives, may offer lower interest rates, no commission for early repayment or no additional costs, such as insurance.

A fairly significant plus of loan consolidation is the increase in creditworthiness, which also most often results from stretching out repayment over time. A smaller monthly installment allows you to draw new funds, which are very often offered by banks that provide consolidation loans. But beware, if we have problems with repayment of obligations, the extra cash can also be a disadvantage of consolidation, as discussed below.

Disadvantages of loan consolidation

The biggest disadvantage of loan consolidation is what we wrote about above, namely the ease of getting new cash. If we are consolidating loans in order to reduce our financial burden, adding additional funds can only make our situation worse. Let’s approach all obligations wisely and not take on more than we can repay.

Another disadvantage of a consolidation loan will be one, usually quite high loan installment. Why? There can be many examples, but if, for example, our income is not regular, the amount of the installment can sometimes be a heavy burden, more so than with two or three smaller installments spread over different days of the month.

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