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A consolidation loan is often the last resort to avoid consumer bankruptcy. The diagnostic report of the Allerhand Institute Foundation states that the total amount of unpaid indebtedness in October 2014 amounted to € 41.55 billion, which is about 7% of GDP. At the same time as many as 2,235,534 people, or almost 10% of adult, do not settle their obligations on time.

How to deal with over-indebtedness?

According to the guide of the Bank Association “How to use credit safely,” a person who becomes over-indebted should contact his creditor and inform about financial problems. In such a situation, the bank may postpone payments for a period of several months. If this solution is not enough to get out of trouble, and we have several loans, you can restructure the debt.

Consolidation loan

Consolidation loan

In order to lower the monthly financial burden, you need to estimate the number of installments that we will be able to repay. On this basis, it is necessary to negotiate with the bank a combination of all existing loans into one, where the monthly repayment amount will not be greater than the initially estimated amount we can afford.

This does not mean, however, that the consolidation loan is cheaper than the previously contracted liabilities. Usually, it is more expensive both in terms of interest rate and the sum of the bank’s receivables due to loan extension over time.

How it’s working?

Suppose we have a mortgage for the amount of € 260,000, interest-bearing 7.5% for 20 years and we pay monthly installments of € 1933.42. In addition, we took out a loan for renovation of 15,000 interest rate of 9% per annum, for a period of 5 years (we pay in equal installments) 311.38 euro. Another charge is a car loan in the amount of € 52,000 incurred for a period of 7 years with an interest rate of 4% and we pay € 710 in installments. In total, our monthly liabilities amount to € 2954.80.

Globally, we owe the banks if we make a timely payment of the contract (assuming the entire loan without the already paid installments): € 502,690.30 for a flat, € 18,682.5 for a repair loan and € 55,950,311 for a car loan. In total, it gives the amount to be repaid in the amount of € 5,810,78,12.

Because the burdens are too large, we go to the bank asking for a consolidation loan. The bank may propose different solutions, taking into account our credit history and market situation. Let us assume that the interest rate to be proposed is 6.9%. In order to reduce the installment, the bank will extend the loan term to 30 years. We will pay € 2,153 in installments monthly – € 801.80 less than before. Unfortunately, as a result, we will pay a lot more for loans, because the sum we pay to the bank over the entire loan period will be € 775,304.45, or € 19,4226,33 more than before consolidation.

Therefore, the consolidation loan should be used as a last resort and at all costs try to pay off the liabilities in the originally declared amount.