Welcome to place, where we aim to help you make smart financial decisions, especially when it comes to loans. Let us guess – while you’ve been taking out one loan after another, somehow you’ve missed the moment that you’re already paying almost half your salary for them! If that’s the case, then in this article we offer you a solution to ease this financial burden.
And no, we’re not advising you to file for bankruptcy or stop making payments. There is an organic and legal way for you to reduce the interest payments on your loans. Interested in how? Then read this article, where we’ll look at the concept of loan consolidation with a clear example. Through the eyes of a simple borrower, we will show how this financial strategy can significantly improve the situation of those who have several small or large loans.
What is credit consolidation?
Loan consolidation, credit consolidation, refinancing, re-crediting… There are so many names, but the essence of the service is almost the same. If you have a lot of loans that you are simply becoming uncomfortable paying for, or you realise that the total interest paid is already over 100%, you should think about re-crediting.
This will allow you to review the total loan amount with one lender instead of 3, 4, 5 and so on. With one less payment on the same day, repaying the loan will not be so frustrating. Even if the problem of multiple loans does not concern you, this service may be useful for you. For example, your mortgage or car loan can always be renegotiated at a new, lower interest rate and thus at a lower cost in the future.
Example of how multiple loans are repaid
Of course, everything seems simple and beautiful in words, but the question is: what does it look like in reality? So let’s take the example of one borrower with existing loans and find out how re-crediting can help him, how much it will cost him and how he can rearrange his loans on better terms. Let’s first take a look at the current situation
One John has taken out the following loans in the relatively recent past and is currently doing so:
- A loan to improve the energy efficiency of his home – EUR 10 000 taken out for 6 years at 6.79%. The monthly payment is EUR 166 and he still has 3 years to pay.
- TV hire purchase – the cost is €1,799, at 10% interest and a monthly payment of €188 over 10 months. He has six months to pay.
- Finance car lease – a car for €14,700 at an annual interest rate of 7.07%. Each month costs €226 and it still has 4.5 years to pay.
- Fast travel loan – €1,500 for 2 years at 51.9%. He pays €93.88 a month and has just over 1.5 years left.
We see that our hero John has a lot of debts. In total, if we add up all the monthly payments, we get about €674, which he is paying back on his loans. I agree, it is quite an impressive amount and his salary would have to be at least EUR 1 500-2000 for such debts to make up 40% of his income. Let us see what can be done in that case.
Merging loans for debtors
Given that John wants to reduce his monthly loan payments, he started looking for ways to consolidate them. Using the services of one of the credit comparators Netcredit.lv, he found a good deal. Even though his credit history was a bit poor, the creditor made him an offer.
He was offered a re-crediting loan of €22 730 at 6% per annum for 10 years and a monthly payment of €252.
This would simply cover all his existing debts for the remaining amount of almost €23 000 and reduce the total interest rate to 6%, which, by the way, is very favourable. Yes, perhaps the repayment term is not so lucky, because instead of being free of credit after 4.5 years, his obligations will extend for another 5 years. However, maybe it is better than losing that income and not finding the 650 euros each month.
How do I apply for a fast loan refinancing?
Refinancing can indeed be offered at a wide range of conditions, starting from 4% and up. After seeing how all of John’s loans were refinanced with one lender on more favourable terms, you may have decided to consolidate your loans too.
If so, here are detailed instructions on how to consolidate your loans quickly and easily:
Evaluate your outstanding loans
Before you run off to apply for a big new loan to cover all your old ones, it’s a good idea to take stock of your debts. There is no point borrowing more money than you need to pay off your debts.
Otherwise, the benefit of consolidating your loans is lost. For example, our John has €22 730 left to repay on all 4 loans and he is applying for that amount, not more! You can find out your total debt by multiplying your monthly repayments by the remaining repayment term.
Choose the right lender
You can find lenders offering remortgaging by searching independently or using a credit search engine such as Netcredit.lv. When doing so, we recommend that you send applications to several institutions.
Or use a financial intermediary who will send applications on your behalf so you can get several offers at the same time. This way you can choose which loan will have a lower interest rate or a lower monthly payment.
Apply for credit consolidation
Once you have chosen a creditor, carefully read the terms of the agreement and the payment schedule, you can sign the agreement. This is most often done electronically, but some lenders may invite you to a branch.
They usually do not charge a fee for this upfront, but charge it in the contract. And you can avoid the 1 cent registration fee by using Smart-ID identification.
Pay off old loans
Once the contract is signed and the money is received, pay off your debts as soon as possible. To avoid unexpected costs, find out in advance if there are any penalties for early repayment of old loans. Simply send the amount you need to the lenders’ bank details, informing them in advance.
Repay one large loan at a time
Now that you have one loan with a larger amount and a longer term instead of several, it’s your job to pay it back. Make sure you don’t miss a single monthly payment and maintain your solvency over this long period.
However, if you lose your job, you can always ask the lender for a credit holiday or a new payment schedule. Don’t be afraid to talk to your lender!
The secret of the most advantageous credit pooling
By the way, we can’t help telling you how to choose a good re-mortgage depending on your preferences. Now let’s calculate 4 loan consolidation options for John, with interest rates of 7% and 17% and repayment terms of 4 years and 14 years, and see how they differ and what they affect.
Here are the 4 different options for consolidating John’s €22 730 loan:
- Consolidation of loans for 4 years with 7% APR and an approximate payment of EUR 540 per month.
- Recreditation for 14 years at 7% APR and a monthly payment of €220.
- Loan consolidation with a maturity of 4 years at 17% p.a. with a monthly payment of €650.
- Refinancing of loans for 14 years at 17% p.a. with a monthly payment of €355.
So, if you want to repay your loans faster without overpaying on interest, we recommend choosing a credit union with a shorter term but possibly with a higher monthly payment. Or, on the contrary, if you want to reduce your monthly payment and the term of the loan is not very important to you, a longer term and a low interest rate will suit you.
In conclusion on loan consolidation
So, if you have several loans and you have only thought about consolidating them so far, or maybe you didn’t even know, don’t waste your time. After all, sending an application is completely free and does not oblige you to apply for a new loan straight away.
Remember that the combination of non-refusable loans in Latvia may vary depending on your preferences and needs. You don’t have to take longer to repay your loan, but if you don’t try to combine loans, you lose the opportunity to save money on interest payments.
Es, Beatrisa Granta, Topkredit.lv veidotāja, izmantoju savu finanšu pieredzi, lai palīdzētu lasītājiem orientēties kredītu izsniegšanas iespēju klāstā un izvairīties no biežāk pieļautajām kļūdām, ņemot patēriņa un ātros kredītus.