Today, many people pay off several loan debts at the same time. Some take new Woburn MA loans because they are accustomed to always having money at hand, and someone was forced by serious circumstances. The reasons may be different, but the financial burden, in any case, will be significant. In addition, borrowers who have two or three loans at once often simply get entangled in their debts. At the moment, you can merge your loans, which is called “consolidation”.
What is the meaning of such a procedure? What are the pros and cons of combining loans?
What is debt consolidation?
Loan consolidation is the combination of several cash loans from different banks into one debt. With this procedure, the borrower combines all his/her loans and becomes a debtor to only one financial institution.
Loan consolidation allows you to make the payment of credit debt more convenient since you get one loan instead of several ones. People usually consolidate cash loans in cases where they want to simplify the repayment process or change the lending terms for the better. It should be noted that the combination of loans and refinancing have a lot in common, but in fact, they are different processes. For example, both are designed to reduce the total cost of the loan. However, with consolidation, loans are simply combined in one loan, and refinancing is the receipt of borrowed funds to pay off current debt. Of course, banks do not always agree to transfer the client’s current debt to another lender without problems since in this case, they lose part of their profits.
Details of a debt consolidation program
Financial institutions, as a rule, are engaged in the consolidation of only personal loans provided for various purposes. A bank that agrees to combine all your debts gives you money to settle with other lenders. As a result, the total amount of the debt remains the same, but the terms of its repayment change.
Loan pooling services are provided not only by commercial lending institutions but also by state-owned banks. At the same time, the conditions of consolidation programs can be individual for each financial institution. Using this procedure, the borrower can combine both collateralized loan products and loans that he/she received without any collateral. However, it is always more difficult to consolidate loans with collateral since the process of transferring the collateral is rather difficult and time-consuming.
Debt consolidation benefits
The service of combining credit debts is very popular among borrowers since it has many positive aspects. These include:
- The ability to change the amount of the monthly installment on account of debt repayment and other credit conditions. By combining all existing cash loans, the debtor can reduce the amount of the regular payment, as well as change its type and repayment procedure. In particular, consolidation allows you to change a less profitable annuity payment scheme for a more optimal option – a differentiated one;
- More convenient and faster repayment procedure. When all current debts are combined, the borrower makes only one payment every month and only to one bank. Thus, the debtor does not need to visit several creditors to make the next installment. This significantly saves the borrower’s personal time and eliminates the need to collect and store numerous documents confirming the fact of payment;
- The amount of overpayment is reduced. You can take a loan to consolidate all other debts at a lower rate by choosing a more profitable program. Therefore, consolidation can significantly reduce the total cost of all current loans;
- The ability to streamline the payment of loans. A large number of current loans is always an increased burden on the borrower’s monthly budget. Besides, it is difficult to pay off several loans at the same time in terms of accounting. Debtors often forget how much, when and to which bank they have to pay off the debt. As a result, a delay in payment is formed. The combination of all cash loans allows you to repay the debt correctly – without delays in monthly installments and other problems associated with repaying several loans at once.
Cons of debt consolidation
Of course, consolidation has not only advantages – this banking product also has disadvantages.
This list includes the following:
- A few financial institutions provide this service. There are currently few banks in the US credit market that consolidate third-party loans. Most often, new organizations that do not yet have a sufficient number of clients offer borrowers to combine loans into one. In addition to them, small credit institutions are also involved in consolidation and they usually have a dubious reputation. For such lenders, the main goal is also to attract as many borrowers as possible. Taking any cash loan, especially combining several at once, is always a certain risk for the borrower. And in the case of contacting a little-known bank, the level of risk increases significantly. It is better to work with already proven large banks;
- Expenses for a credit transaction. By consolidating all of your debts, you receive a new cash loan. And the registration of any loan is the collection of the necessary documents and payment of all associated costs. This includes: processing an application, commission for issuing borrowed funds, etc. If loans received under the guarantee of third parties or under other security are combined, then the list of expenses increases. In addition, consolidation implies early repayment of current loans. And many banks impose a penalty on borrowers for early debt repayment. That, in turn, also complements the list of expenses when registering a consolidation.
- Before proceeding with debt consolidating, you should carefully read each loan agreement;
- It is recommended to calculate in advance the possible benefits of consolidation, taking into account all mandatory and additional costs;
- You need to contact a trusted credit institution with a fairly good reputation;
- You should remember that loan consolidation only simplifies their repayment and does not significantly reduce the financial burden;
- Banks often deny borrowers the opportunity to transfer their debt to another financial institution, so the consent of all lenders must first be obtained.