Debt consolidation is the combination of two or more previously drawn loans into a single liability while harmonizing the interest rate and other conditions, usually with the simultaneous extension of the repayment period. The main reason for using debt consolidation is to reduce your monthly installments.
You can consolidate many types of loan obligations – mortgage, cash, installment, car, personal account overdraft or credit card debt, but also previously consolidated loans. It is a kind of game with several parameters – interest rate, commission, repayment period and collateral if the consolidation is a mortgage.
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The main purpose and at the same time the primary benefit for the borrower is the reduction of the monthly costs of servicing his debt. The debt consolidation is connected with the extension of the repayment period, which allows constructing the amount of the monthly installment paid by the borrower so that it is lower than the sum of installments paid so far. The money saved in this way can be used for other purposes. Often, additional creditworthiness is released, giving the possibility to take another loan, which was not possible before. Not without significance for the borrower is the need to pay only one installment per month, which definitely facilitates the control of debt repayment, and thus the household budget, as the expenses incurred become more transparent. In addition, by paying one installment instead of several, you can make arrangements with the bank so that its maturity falls on the date most convenient for the borrower, i.e. when the borrower has cash, e.g. just after the day on which he receives remuneration or a retirement benefit. Some banks also give the borrower the opportunity to agree to a grace period of several months to pay back the consolidation loan, however, such options are not common and apply to consolidation loans with mortgage collateral.
The bank also does not lose
The main benefit is taking over the customer and binding him for the longest possible period with the bank that will consolidate. It is not uncommon for a borrower, who is a customer of several banks, in which he took out various loans, to become a client of only one bank for many years through one consolidation. In addition, the bank takes full control over the state of the borrower’s liabilities, which in the event of any threats to loan repayment allows the institution to react faster and more efficiently in the form of subsequent debt reconstruction, an extension of repayment terms, or an increase in the level of collateral. In the event of reliable repayment of consolidated liabilities, the bank acquires a loyal customer to whom it can offer its other products – a personal account, term deposits, payment cards or credit cards.
The high level of competition in the banking market encourages its participants to use various forms of customer acquisition. More and more banks have a universal character and a very diversified offer. Today, it would be difficult to imagine the existence of these institutions without such a tool as a consolidation loan. It has become one of the most important ways to build a loan portfolio of banks which, while fighting for clients, come up with newer and newer variants.