In the 21st century loans and loan commitments have become one of the most important factors which stimulates economics, because when the lending reduces, also the economic growth and the amount of gross domestic product reduces. That is why a lot of various loans are available to consumers. Despite the fact that all these loans differ from each other in several aspects, their function is the same – to lend the money when it is insufficient.
It is not a secret that this spread of credits has not only positive influence, but also negative consequences. Today in various websites and media we can read and hear different horror stories about people who have borrowed too much loans and now are not able to repay them. To facilitate such people’s lives credit experts created debt consolidation.
Although situations when lenders lend the money to people who have other loan commitments are rare, they still are. It is not a secret that every loan creates some kind of financial problems, but the situation where there are several loans is thoroughly unenviable. To ease this kind of situations there are great solution which is called debt consolidation or, in other words, debt unification.
Being in several loan commitments creates a lot of different problems – it is not only financial, but also moral burden, because the borrower not only overpays considerable sums of money, paying for credit interests, but also discomposes or even forgets some loan payments, because the borrower has to keep in mind all credit payments and their schedules. In order to avoid different burdens and inconveniences, which are the result of several loan commitments, borrowers can use an option – debt consolidation – which is sometimes known as debt restructuring as well.
Regardless of whether the borrower has several loan commitments for voluntary or involuntary reasons, it is recommended to use a debt consolidation, facilitating both financial and moral side of loan commitments, since the objective of debt consolidation is reduction of monthly loan payment. In the case of debt consolidation loans with high interest rates are united into a single loan which has lower interest rate than each loan separately.
Debt consolidation is offered both by banks and by private lenders. Taking into account that the total costs of loan are formed not only from the loan principal, but also from loan interests which are quite high, existence of several loans is the most disadvantageous and the most unpleasant situation which has to be solved as soon as possible. Since fast loans are the most disadvantageous loans, debt consolidation is often used in the case of several fast loans. That is why debt consolidation is often described as consolidation of short term loans into a long term loan.
In the result of debt consolidation majority of loans turns into consumer credits or other credits which have similar amount and conditions as consumer credit. Sometimes short term loans are not consolidated, but added to actual long term loan, for example, to mortgage. Long term loans like mortgages have interest rates from 3% to 5% which are definitely lower and thus more favourable than interest rates of short term loans which are usually from 10% to 20%. Of course, it is possible to consolidate several long term loans too, consolidating them into a bigger loan which also has more advantageous conditions than separate loans, for example, longer repayment time with lower interest payments.
Debt consolidation is advantageous both for borrowers and lenders, because in the result of debt consolidation the borrower obtains financial stability, but the lender obtains borrower’s loyalty, which is dedicated to one lender, not to several lenders.
It should be mentioned, that debt consolidation is always more favourable than existence of several loan commitments. However, also in the case of debt consolidation remember to repay the loan as soon as possible, because the sooner it is repaid, the lower are the total costs of loan, which are the combination of loan principal and monthly interest payments in the long run.
Fundamentally debt consolidation is nothing more than borrowing of new loan in order to pay debts from previous loan commitments, as well as to save money in loan payments. Unbelievable, but a lot of borrowers still do not know about this option and continue to pay high interest rates of their loans, although in reality it would be possible to consolidate them into a single loan with lower interest rate.
Debt consolidation has following advantages:
- Reduced interest rates – the greatest advantage of debt consolidation is possibility to reduce loan’s interest rate, because long term loans always have lower interest rates than short term loans which can reach several hundreds of percents. As interest rates directly affect the total costs of loan, debt consolidation reduces not only interest rates, but the total costs of loan as well.
- One loan payment – if you have several loans from different lenders, but you have not applied for automatic payments, you have to make several payments every month which requires a lot of time. In the case of debt consolidation all separate loans are consolidated into a single loan, therefore, you have to make only one payment instead of several payments.
- Lower monthly payments – as the new loan has lower interest rate and longer repayment term, also monthly payments are lower, but beware, because the longer is repayment time, the bigger are the total costs of loan. In the case of long term loan monthly payments are lower, but you should know that every loan should be paid as soon as possible, otherwise you run the risk to overpay in interest payments.