Are you wondering how debt consolidation works? If you are here, it is probably because you have several personal loans granted and you would like to have them all in one loan to avoid having several open lines. When we request more than one loan, what happens is that sometimes we may not be able to meet the installments of the different loans, hence why many people opt for the consolidation of outstanding debts.
What is a loan?
We can define a loan as the agreement in which the lender lends money to the borrower . This provision is made under a series of conditions. These conditions are linked to the repayment in exchange for interest, an agreed monthly payment and possible links in some cases. All of this is recorded and linked in Title X of Book IV of the Civil Code.
When a person takes out a loan, he or she agrees to pay back the money in monthly installments. If the borrower defaults, these installments will be accompanied by interest and if the borrower is not paid, then the lender can take the borrower to court to recover the money he or she has lent him or her.
Contenidos
How can loans be consolidated?
It is important to be clear that debt consolidation is the cancellation of existing loans and the taking out of a new one that covers all outstanding debts. This means that all outstanding amounts to be paid are included in a single loan.
In order to carry out debt consolidation, it is necessary to follow these steps:
- Analysis: Before you get down to business, you’ll need to do some math. Loan consolidation is especially recommended for families who are over-indebted and need a break from their monthly payments. If you don’t have trouble meeting your monthly payments, then this option is probably not for you.
- Compare: If you have realized that you really need loan consolidation, take your time to choose the best option. There are more and more alternatives, compare and choose the financing that really suits your needs. Do not make the mistake of applying for the first consolidation you find.
- Apply for a new loan : depending on the amount you owe, it will be better for you to apply for a loan or a mortgage. Regardless of the option chosen, you should know that you will have to present all the documentation for the prior study of your financial situation. You should always make clear what the purpose of the money is. If the financial institution considers the operation to be safe, it will grant you the new loan.
- Set up a reunification : it is important to set up a reunification to pay what you will really be able to pay. It is always recommended to pay the loan in the shortest period of time possible to pay less interest. But we always have to look at our income to find a payment that suits our financial capacity. We should always avoid over-indebtedness.
- Cancellation of outstanding debts : after obtaining the money from the consolidated loan, it is time to cancel the outstanding debts. It is important to remember that in many cases the cancellation of the loans will be linked to early repayment fees. Keep this in mind because they are usually 0.5% to 1%. Keep these percentages in mind if you really want to balance the accounts when carrying out the consolidation.
- Reorganization: After reunification, it will be time to get used to the new conditions. Now you will not have to pay several monthly installments, but rather one, larger one.
Can I pay one monthly fee instead of several?
Yes, debt consolidation aims to help the debtor deal with his or her debts more easily. It eliminates all open lines of credit to create a single line of credit .
- When taking advantage of debt consolidation, we must always look for a monthly payment adapted to our financial capacity.
- As far as possible, we should try to find financing with the lowest interest rate . This way, the monthly payment will be lower and it will be easier to meet the payments.
- It is important to choose the smallest number of installments possible. This way, the debt will be paid off in the shortest possible time. But always keep in mind the amount of the monthly installment.
- Sometimes it is better to extend the life of the loan, but get lower monthly payments. It is true that we will pay more interest, but in exchange we can have a little more breathing room.
What are the costs of debt consolidation?
Debt consolidation without a mortgage is accompanied by a series of expenses, which we will show below. You should take them into account to see if you are really interested in taking the step or not.
- Cancellation fees : When you cancel all open loans, you will notice that you have to pay a cancellation fee.
- Opening fee : In many cases, the consolidated loan will be accompanied by an opening fee. Sometimes, there is none.
- Interest: In exchange for extending the life of the debt to pay a lower monthly payment, what you actually pay is more interest. Remember, the longer the life of the loan, the more interest you have to pay.
What does it take to consolidate a debt?
In order to carry out debt consolidation, you must meet the following conditions:
- You will need to pay off multiple loans to combine them into one.
- Not having unpaid debts.
- It is often very helpful to have collateral such as real estate.
- You will need to demonstrate recurring income.
- Demonstrate that you are capable of facing the debt you are going to assume.
Conclusion
In conclusion, debt consolidation can be an effective solution for those who have multiple debts and want to simplify their financial management. By consolidating all debts into one loan, it is possible to obtain a lower interest rate and a more affordable monthly payment. However, it is important to keep in mind that debt consolidation is not suitable for all situations and may have additional costs, such as fees and cancellation fees. It is essential to carefully analyze the available options and choose a reliable and transparent lender. In addition, it is essential to address the underlying causes of debt and develop healthy financial habits to avoid future problems.
Now that you know the information you are looking for about debt consolidation , you will have to do the math and see if it really interests you. Remember, there are currently many alternatives to choose from, you should choose the option that best suits your needs. A good comparison will help you save a lot of money.
