Debt Consolidation Loans

Free access to credit programs result in unlimited credit numbers. Banks and non-banking institutions issue loans with different repayment terms. Not only the loan amount or the repayment term differ, but also the interest rates.

An increase in the payment burden due to the simultaneous execution of several loans provokes untimely debt repayment due to banal forgetfulness or temporary financial difficulties. To avoid late payments, while keeping a positive credit history, a loan consolidation procedure is provided.

What is debt loan consolidation?

Loan consolidation is a set of banking measures to combine several loans and credits into one. The ultimate goal of using consolidation is to reduce the burden on the payer. After consolidation, the loans are combined. Instead of several small payments, the debtor undertakes to make one monthly payment to pay off the debt.

Loan consolidation banks can offer:

  • low interest rates;
  • flexible payment requirements;
  • prolongation of maturity;
  • decrease in monthly payments;
  • revision of the agreement terms.

How are loans consolidated?

Debt consolidation is not always included in the list of services provided by financial organizations. This method of revising credit terms is widespread in Western countries, where intermediary companies are involved in debt consolidation.

Banks usually use loan consolidation as part of the refinancing procedure. This approach of debt management allows you to revise the repayment terms of multiple loans, simultaneously combining them into one loan with an updated repayment schedule.

Consolidation of loans is available to adult clients with a perfect reputation and stable income. The bank has the right to demand identity documents, confirming income and proof of borrower’s employment.

Types of debt loan consolidation

You can consolidate debts that have formed as a result of the use of credit cards, consumer loans or microloans. As a rule, a consolidation of no more than 5 existing obligations is allowed. The parties agree on the terms of the new deal individually without involving the original creditors.

Types of consolidation

  • Collateral. This loan consolidation implies the availability of collateral. The borrower must provide liquidation property as collateral in order to consolidate the debt. The loan is issued at a low interest rate. After the imposition of an encumbrance on tangible assets, there is a risk of loss of the mortgaged property in the event of default on credit obligations.
  • Unsecured – provided without collateral and resembles a consumer loan for any need. Consideration of the application takes more time, since the client needs to confirm his solvency. Under the updated lending program, the interest rate increases, and the amount disbursed does not exceed the total amount of the combined loans.

As a separate service, consolidation on favorable terms can be offered by a bank that works with a client under several lending programs.

For example, if a consumer loan and a credit card are issued at the same time at a financial institution, debts on these banking products can be combined.

Preparing for consolidation

Before signing an agreement to consolidate debt or deciding on such a step, the borrower needs to carefully prepare. Reckless use of banking services can significantly worsen the financial situation.

The borrower is recommended to:

  • assess the change in financial burden indicators due to the consolidation of debts. The data obtained as a result of calculations must be compared with information on the total costs that will arise without the merger of loans. Sometimes, it is more profitable to repay several loans, for example, if the term of one of the transactions is nearing the end of the loan.
  • if there are several offers from different financial institutions, choose the most profitable option, taking into account the loan amount, interest rates, term and date of monthly payments. Special attention should be paid to additional services and the terms for possible penalties.
  • make sure that the chosen consolidation option is not only economically viable, but also affordable in terms of speed of processing, collection of documents, extra fees and quality of service.
  • check the list of required documents in the financial institution, and then collect them as soon as possible. The deadlines for submitting documents will have to be clarified on the website or with the bank’s employees.
  • the decision to consolidate loans should be made taking into account financial capabilities and based on information about the current financial situation. To avoid falling into an even deeper debt hole, the borrower needs to think about the risks that will have to face after consolidation.

Before applying, you need to consider:

  • expediency of consolidation. The new loan should be more profitable than the previous ones.
  • requirements for collateral, if collateral is provided for a credit transaction.
  • lending terms, in particular rates, fees, commissions and monthly payments.
  • information about the bank and the loan pooling program chosen by the borrower.
  • amount of extra fees in case the consolidation option is paid off.

Standard consolidation algorithm

  • Searching for a profitable loan product, studying the terms and preparing for the preparation of an application;
  • Submission of an application and the collected package of documents to the selected credit institution;
  • Consideration of the request, making a decision and notifying the client about further actions;
  • Coordination of all the nuances of the transaction and the signing of a loan refinancing agreement with consolidation;
  • Issuance of funds by a new creditor to pay off previous debts.

Debt loan consolidation steps may differ depending on the bank and the type of procedure chosen. For example, in the case of using collateral, you will have to provide information about the property selected to secure the transaction. In any case, having drawn up a loan agreement, the debtor will be forced to pay off one large loan instead of several small loans.

Grounds for refusal to consolidate

The decision to consolidate loans at the initiative of the client is made by the financial institution to which the application is submitted. No early repayment of loans is required from the original lenders. As a result, having studied all the subtleties of the procedure, the borrower will be able to increase the chances of making a deal with the most favorable terms.

Reasons for declining consolidation requests:

  • insufficient income level;
  • age restrictions;
  • bad credit history;
  • misleading the creditor;
  • mistakes when filling out the application;
  • re-consolidation of loans.

To increase the percent that your request will be approved, you should look at the reasons for the rejection. As a rule, applications are rejected due to typos or non-compliance of the client with the bank’s requirements. Having corrected the mistakes, the application can be resubmitted.