Refinancing and consolidation loans are becoming more and more popular. Nothing unusual. After all, they are supposed to help pay off existing commitments and improve the borrower’s financial standing. All because of savings in installments and a more friendly repayment model.
Let’s start with refinancing
The refinancing assumption is to make a new commitment to pay back the previous loan or loan. It is therefore a special-purpose loan. In addition to transferring your loan repayment to another bank, it is not uncommon to get extra cash.
Refinancing mainly concerns housing loans. Refinancing involves establishing security on the property. This financing model is popular just in the housing loan segment for a simple reason. The mortgage is for many years, during which the banking offer changes. Therefore, it may turn out that the repayment of the previous liability with a refinancing loan will be financially profitable. Refinancing is also useful if the financial situation suddenly changes. If the customer increases the income, the bank will certainly offer better credit terms
. Due to the fact that creditworthiness will increase, the liability can be paid back earlier, which means that the total cost of the loan will be lower. The customer will pay lower interest. This solution is also beneficial in the opposite case. When the financial situation worsens, the loan period may be extended. Although the interest cost will increase, the installment will be lower for every borrower’s monthly budget.
It is different in the case of a consolidation loan
There are borrowers who pay off several loans at the same time. This is not a rare situation. Home loan installments, personal account overdrafts, and credit card debt are the most common. When we add different repayment dates to it, it becomes a real problem. You need to plan your budget skillfully so you don’t get lost in it.
Such a number of loans, especially those of the short-term incurred on day-to-day expenses, can seriously damage the stability of the household budget. Because such loans are especially expensive.
When a large number of small commitments become pregnant, it is worth getting interested in consolidation. The principle of this solution is simple. The bank sums up all its liabilities and then repays them. The client stays with one loan – consolidation. Who will ask … repaying one loan to another? This is the worst solution. Such a statement is true but it does not apply to carefully considered consolidation.
The consolidation loan is secured by a mortgage (as opposed to cash loans, which are often not as well secured), and because of this the cost of such a commitment is much lower than any consumer credit. Another advantage of such a solution is the extension of the loan period. Cash loans must be paid back quickly (usually up to five years). In the case of a consolidation loan, the repayment period is up to 30 years. All this means that the load on the household budget is much less. First of all, because one installment is repaid and in an amount much lower than the sum of installments of all liabilities repaid to date.
One of the significant advantages of a consolidation loan is the uncomplicated procedure
Many banks assume that the financial situation of the clients that granted the original loans has already been investigated. Usually, it is enough to confirm employment and present bank statements from several months back.
As already stated, consolidation must be carried out in-house. It will be unprofitable to change three loans taken for two years into one consolidation loan with a repayment period of 10 or 20 years. Of course, the installment will be drastically lower, but the sum of interest paid to the bank means that such a conversion of liabilities is completely unprofitable.