There is currently an unimaginable range of various financial instruments in the world. Those of them that serve individual consumers, not large banking corporations, are a small piece of the whole cake. However, it is still large enough to be easily lost. In addition to loans taken for any purpose, such as shopping or holidays, there are consumer, mortgage, investment and many other loans. Each of these categories is often divided into smaller subcategories in which loans and advances offered by different banks may differ significantly from each other by loan terms, interest rate and other factors. To lighten this complicated world of finance a bit, today we will look at one of the types of credit that will usually appear when we have too many others. Let’s check what debt consolidation is and what it is.
What is the best debt consolidation loan?
A consolidation loan is definitely an instrument that gives us above all convenience. If we feel that we are overwhelmed by the number of liabilities that are overseeing and paying us back, we should consider this type of loan. It will help us feel relieved and breathe peacefully after times of chaos and chaos. However, we must be aware of the price we will be forced to pay, i.e. increase the final amount that we must payback. If we think that it is worth our peace and order our debts, we can reach for such a loan.
At the same time, it will be a good solution for people who anticipate financial difficulties in the near future, which may threaten the regular repayment of liabilities and ensuring survival for themselves and their loved ones. Combining all debts into one will make us pay more in the long run, but will give us some margin of error and the ability to handle a little more cash to deal with our debt more efficiently.
It is worth remembering that debt consolidation is not a magical savior of all those in debt and will not make our debts evaporate. If we are determined to conclude an agreement with the bank, it should be a clear signal for us that we are not dealing with our own debts and we should pay much more attention to how we operate our finances. It should also work for us as a stimulus that will encourage us to work on getting out of debt and paying off our obligations, and this is certainly a signal that we can not afford to get more loans. No matter how smiling the actors are in payday loan ads.
More and more debt
We live in a time when it is becoming easier to borrow some money, regardless of their destination. The ubiquitous ads for loans and payday loans encourage us to spend 15 minutes filling out the online form and receiving the amount we need. The same ads depict people who need money to finance an unforeseen event, buying an expensive gift for a loved one or a spontaneous trip to their dream vacation.
Every time these people are incredibly smiling and happy. However, taking loans is not always so pleasant. As long as we act reasonably and do not get into excessive debt and remain in control of our finances, everything is fine. Every year, however, the number of people who lose this control and take out more loans is increasing, forgetting to look at their finances as a whole. This translates into the ever-increasing debt of UK citizens. At present, 8.3 million people in the British Isles are in serious debt. The average household is currently in debt at GBP 58,540. If our habits lead us to do the same, it may have fatal consequences for the financial security of us and our loved ones. Falling into debt may encourage us to reach for a solution more and more often offered by various banks, which is debt consolidation. However, is it always a good idea to use this product?
What is debt consolidation?
The consolidation loan takes its name from the word consolidation, which the PWN dictionary translates as “activities carried out to achieve internal consistency of a group or structure; also: the state resulting from these activities. ” Translating this into a more understandable language, it is the conversion of many, often chaotically connected, entities into one coherent creation. In banking, and in particular, in the context of loans, this means that many loans, debts, and liabilities are converted into one. In practice, instead of paying off several loans to many banks at once, we change it into one liability that covers the repayment of the rest. This is a seemingly very convenient solution, but it can also have negative sides.
If we are overwhelmed by the number of various loans we have taken and for our own convenience and transparency of our budget we decide to “clean up” this mess, the bank will propose to us to combine all debts under one loan. In practice, it works this way. The bank grants us a loan, i.e. lends us money, however, instead of landing on our account, this money is intended for the repayment of our debtors by the bank. Thanks to this, the companies that we had to pay back earlier recognize our debt as repaid and we have no more obligation to provide our money to them. However, this debt does not disappear. Instead, the debt is now being taken over by the bank as part of our debt consolidation.
Very often, such a loan offers us an installment that is lower than the sum of the installments we previously repaid. At first glance, it looks great. Not only that, we no longer have to remember about various obligations and spend time manually making any transfers, it also relieves our monthly budget, because each time we pay less than before. Especially if we do not use standing orders and automatic banking, this is a great convenience and the greater incentive to convert many liabilities into one. It does not mean that our debt has magically decreased. Banks are great institutions that are not known for their blessing and altruism, so we can’t expect them to just let us pay less than we owe them.
The reduction of the installment amount compared to the previous state is made up of a longer repayment period, which results in a higher sum of interest that we have to pay. Also here, as with many other types of loans, the bank may charge a commission for granting a new loan and, as is often the case with merging all debts into one, a commission for early repayment of loans from other banks repaid with new debt. If we decide to secure our new loan with a mortgage, the costs we incur must also include the cost of our property valuation, notary services fees and mortgage entry.
Like all financial instruments, debt consolidation is a product that has a lot of potentials. Let’s remember that we can build a house and break a window with a hammer. It all depends on how you decide to use this tool. So when is it worth reaching for this product?