Debt consolidation: what it is, how it works
The debt consolidation loan represents an opportunity not to be missed to review and improve the rate that characterizes the various existing loans. To choose the most convenient one, it is necessary to take into account the economic conditions that are applied and in particular:
- the evaluation of the single monthly installment;
- the overall cost of the offer, given that in addition to the installment, accessory costs also come into play;
- all expense items.
It is no coincidence that we talk about “all” the items of expenditure, since they can be many: in addition to the amount paid, it is good to take into account the ancillary charges, interest, insurance costs, initial expenses if provided and so Street.
The fact is that these expenses cannot always be measured in an easy and immediate way: also for this reason it is necessary to evaluate the APR and the Tan. We will talk about the APR later: the Tan, on the other hand, corresponds to the nominal annual rate, i.e. the interest rate that is applied to the financial capital, gross or net – depending on the case – of the preliminary and insurance costs. This value is used to understand what the share of interest will be due to the bank, taking into account the duration of the loan and the amount disbursed.
What guarantees are required
The granting of a debt consolidation loan, in principle, does not presuppose that the applicant submits collateral, for example in the form of a mortgage or lien on assets owned by him.
This does not mean that there are cases in which credit institutions – above all to avoid the risks of insolvency – decide to submit to those who request this type of financing a contract that imposes a single promissory note, or alternatively the change of installments, such to be insured or the entire amount that is disbursed or any part of it.
On the other hand, it must be said that the most widespread form of guarantee must be identified in the signature of a third-party guarantor or of a co-obligated person who acts as guarantor with respect to the positive outcome of the operation.
In the presence of specific conditions (perhaps a recent seniority of the applicant, or a very high sum, or a past not crystal clear from the point of view of the repayment of the loans), this request is very common. In summary, it is not possible to identify unique and universal rules for each case of debt consolidation loan, given that it is the individual institution that decides which guarantees to request, taking into account the risk profile of the applicant and the transaction.
The importance of the APR
The APR is one of the most important aspects when it comes to debt consolidation loan: it is the Global Effective Annual Rate and is nothing but a measure of the global cost of financing which is expressed on an annual basis with two decimal places in percentage terms.
The APR differs from the Tan because it includes any additional charges to be borne by the customer, such as insurance costs and preliminary costs.
The Italian legislation, in any case, under specific conditions guarantees a fairly significant discretion from this point of view: insurance costs may not be included in the calculation if they are optional, for example. This is why it is important to carefully check the overall expenditure by examining the individual items of the offer with which you are dealing.
The APR can also serve as a comparison element in the comparison between various offers of financing, provided that the loans have the same characteristics in terms of duration, amount and other costs that may be envisaged. If there are ancillary costs, the APR for the same duration decreases when the loan amount rises and for the same amount it decreases when the loan duration increases.
Whoever provides the debt consolidation loan
The debt consolidation loan can be disbursed by any financial or credit institution. Obviously, each institution refers to different risk policies from the point of view of the requests it receives, in order to keep the level of insolvencies as low as possible.
Another factor that is considered by lenders is the creditworthiness of the person requesting the loan, also in relation to the credit relationships that are made available by the Risk Centers: it is clear that a person with a credit history characterized by unsolved or Late repayments could have difficulty getting a debt consolidation loan.
The Benefits of Debt Consolidation Loan
The debt consolidation loan is characterized by obvious advantages, the most important of which is that it allows you to deal with a single counterparty for all the debts that have been contracted, whether it be the loan relating to the purchase of a washing machine, whether it is the mortgage for the renovation of a house.
Fragmented loans, usually having different percentages of interest rates, different maturities and durations, are merged into a single installment. This translates into an obvious simplification from a bureaucratic point of view – there are fewer procedures to deal with, there is less time to waste for administrative formalities – and, moreover, it allows you to benefit from long-term payments, with a reduction in the installments amount. With this solution, in fact, the debts in progress are paid off and then distributed in a new financing project which proposes longer times and, as mentioned, lighter installments.
The disadvantages of debt consolidation loan
Choosing a debt consolidation loan, on the other hand, we must also not forget the various disadvantages we face: starting from the fact that a solution of this type makes you lose the costs and expenses incurred for the opening and management of loans in progress.
When applying for such a loan, in fact, not only was part of the loan repaid, but additional costs were also paid – that relating to insurance, for example – as well as the expenses for opening the practice.
These costs are obviously lost, without forgetting that even the signing of the new contract entails an expense, not being free: as for all the loans to be opened, even the one for the consolidation of debts presupposes expenses.
Another weak point of the debt consolidation loan is that it is not granted to those who have difficulties in repaying loans. It may seem like a paradox, but in reality it is just like that: a solution that should help to heal a complicated financial situation is often not made available to those who have to do, in fact, with a complicated financial solution.
Of course, the point of view of banks and credit institutions is understandable, but this represents a problem for those who would potentially be interested in using them.
What aspects should be paid attention to
There are many aspects to pay attention to when choosing the best debt consolidation loan. The main feature of this formula is that the possibility of obtaining extra liquidity is based on a rather long preliminary process, as well as complex is the assessment of the feasibility of the operation: in fact, there is a need to make everyone available the documents relating to the loans that must be extinguished, with particular reference to the relative extinguishing accounts, ie the documents certifying which amounts are to be paid to the various credit institutions.
It is then necessary to evaluate all the elements of the contract : the expiry of the individual installments, the interest rate that is applied, the guarantees required, the APR, the price and the expected charges in case of late payment, the insurance coverage that is not part of the APR calculation, the conditions under which the APR can be changed, and so on.
In particular, it is appropriate to ascertain what happens in the case of non-payment of an installment : the consequences could be unpleasant, with an increase in interest, the application of a delay and above all the risk of ending up in the list of late payers, or even being reported to the Central Credit Register, i.e. the credit protection bodies which would then transmit this information to all the banks.
Choosing the best debt consolidation loan, therefore, means taking into account numerous factors, both on a practical and an economic level, at stake: therefore, it is good to take into consideration not only the advantages offered by this solution, but also any disadvantages that can be met, so as to identify what really suits your needs.