Combining the installment of several loans: is debt consolidation worthwhile?
This is one of the questions often asked by those who have multiple debt situations in progress (see also Loan for protestors and bad payers). The answer is generally yes, but let’s try to understand in detail how debt consolidation works.
What is it about?
It is a new loan that can be requested in order to pay off two or more ongoing loans, to obtain a further extension of the debt over time and therefore a monthly installment that is lower than the sum of the installments previously due. In addition, the monthly management of payments due is simplified, grouping all of them into a single installment. In some cases it is possible to check advantageous rates compared to those used in the past and, if necessary, it is possible to obtain additional liquidity at the same time.
One of the main advantages of debt consolidation is, therefore, the possibility of obtaining a lower monthly economic impact, in some cases obviating the pressure of the individual installments which is often no longer sustainable.
Evaluation criteria and requirements
Since it is a personal loan in all respects, the request will initiate the investigation phase during which the credit institution to which it is addressed will carry out the necessary assessments on the applicant according to the following criteria:
- specific risk policy: banks and financial companies assess the percentage of risk associated with a specific type of loan based on the statistical data in their possession (credit scoring) with the aim of minimizing insolvency cases;
- income received by the applicant and percentage engaged in any other loans that you do not wish to consolidate;
- creditworthiness (any non-payment relating to the loans to be consolidated, presence of reports to Crif).
No form of collateral may be necessary (pledges or mortgages on property and real estate) and the signature of a co-obligation or a guarantee may be required. More rarely, banks and financial institutions offer changed loans.
Banks and financial institutions follow internal policies for the evaluation of requests, but in principle, in order for the preliminary investigation phase to be successful, the applicant must meet the following requirements:
- be aged between 18 and 75;
- have an indefinite-term employment contract, with a length of at least 6 months for private employees and at least 1 year for self-employed workers;
- have a good credit position.
In the event that you do not have a paycheck or have recently been reported to Crif as bad payers, in the absence of an excellent guarantor or better still a co-obliged party, access to this form of financing is difficult.
However, reported or foreclosed employees or pensioners will be able to resolve their economic difficulties by accessing the assignment of the fifth, which is not based on creditworthiness, but on the retention in the paycheck / payslip of the pension. With the credit obtained, they will be able to independently repay the previous ongoing loans.
Timing and documentation required
Before choosing, it is advisable to request two or three estimates from different institutes in order to identify the most economically advantageous offer from the point of view of the rates applied (TAN and above all APR).
In addition, those who want to take advantage of the opportunity of debt consolidation must do it well in advance of the real needs: this is because the time to obtain the debt consolidation is often longer than the normal granting of a loan since the preliminary investigation phase it is more complex, having to evaluate not only the creditworthiness of the applicant, but also the feasibility of the whole operation itself.
In fact, in addition to the identity document, tax code and income documents, all the documentation relating to the loans to be extinguished, with the related extinguishing accounts, must be provided to the chosen credit institution. Retrieving this documentation takes time, but if the applicant signs a proxy in favor of the credit institution that is proceeding with the consolidation, the counts can be retrieved directly from the bank or financial.
After this phase, more repayment plans may be proposed, with different durations, to try to find the most comfortable amount to be repaid. Therefore, having chosen the one that seems to be the most suitable, upon accepted request, the bank will directly repay the various loans to be paid off in advance by replacing them in practice with its own. The financed will only have to pay the new lighter installment every month, thus being able to reorganize their finances.
Only in the event that the request for debt consolidation is also accompanied by the request for greater liquidity, will there be a credit to the account of the financed for an amount equal to this surplus.
When is it convenient?
Loans are repaid using French amortization. This implies that early repayment of a loan that has almost ended is not often convenient, since interest expenses have been almost all repaid and would only end up having to renounce the advantage of paying in installments an amount on which no longer owes interest. So entering the loans that are towards the natural end of the amortization plan’s duration is clearly unprofitable.
It will also be necessary to evaluate the possible penalties to be paid for the early repayment of the debt, even if in most cases these are not due when the loan is fully paid off.
It will also be appropriate to evaluate, in the event that you intend to extinguish loans covered by insurance, if the unused benefits can be recovered with early repayment.
Debt consolidation is more convenient if a modest lengthening of repayment times and a reduction in the interest rate applied can be used at the same time.