The marketing of consumer loans in the form of consolidation loans has recently been increased and is being offered to customers by many online lenders. The purpose of applying for a compound loan is usually to save on the costs of individual loans. However, spontaneous bundling of loans with consumer credit can, in the worst-case scenario, be more costly than separate smaller loans.
“Combining loans can save you costs, but also sink your finances deeper,” says Good Finance.
Traditionally, consolidation loans have been provided by banks and social lenders such as the Guarantee Fund. The difference between traditional mortgage loans and independently purchased consumer loans is that traditional mortgage loans are often collateralized and independently purchased consumer loans are unsecured.
The interest rates and costs of unsecured credit are higher compared to a secured loan. According to Minna Mattila, Communications Manager for the Guarantee Fund, it is very common for their clients to take out expensive consumer credit on their own initiative to combine loans.
“People try to survive on their own until the very last,”
“According to our nearly 30 years of experience, debt consolidation requires very careful debt settlement and accurate assessment of the income, expenditure and solvency of one’s economy,” he continues.
Mattila hopes that during the loan application process, the lenders will thoroughly investigate the borrower’s financial situation and solvency.
“Creditors should also be aware of their responsibilities when offering quick and easy consolidation loans to people who are already in debt,” Mattila emphasizes.
What is a consolidation loan and what should be considered
In practice, loan consolidation is the repayment of existing loans, loans and other debts with one large loan. For example, if the credit card debt, the instant loan and the car loan together make up the total debt of $ 50,000 plus the cost, in practice, combining the loans will result in a single large loan of $ 50,000 to pay off current debts .
According to Nordea’s Regional Director Jorma Pirinen, the need for a consolidation loan is usually due to the fact that the customer is indebted to various parties as a result of several consumer loans. Pirinen emphasizes that you should not try to solve problems alone.
“You can and should seek help from your own bank, the municipal financial and debt advisors and the Guarantee Fund Debt Line,” he recalls.
“Then we look at each customer’s situation individually. The most important aspect of the arrangement is the customer’s ability to pay, which after the merger should be sufficient for credit management and normal living, ”Pirinen explains.
The Guarantee Fund grants a consolidation loan of up to EUR 34,000. Loans are often applied for in excess of this amount, even though the Guarantee Fund is not involved in sub-arrangements whereby the customer would have more than one loan to settle.
“Our experience is that the debt spiral will then easily start again. This is a typical mistake that comes from a person’s own-initiative debt consolidation. ”Mattila describes.
Good Finance emphasizes that the benefits of combining loans must be carefully calculated before applying for a consolidation loan. However, he points out that a consolidation loan is not the only option for paying off debts:
“It’s important to remember that it’s possible to negotiate with most borrowers about the payment schedule and the amount of repayments – sometimes it’s a better option than a compound loan.”
How to use the Loan Consolidation Calculator
- Current loans:
- An example is consumer credit
- Enter the outstanding amount of your consumer credit debt, the interest rate on your loan, your monthly repayment, and the monthly expenses in the cells marked in green. Monthly charges may include, but are not limited to, a loan management fee or a billing surcharge.
- The orange figures show the total cost of loans and credits
- An example is consumer credit
- Consolidation Loan:
- The principal of the consolidation loan is automatically calculated according to the current loans.
- Enter the interest rate for the planned consolidation loan, the cost of establishing the loan, and the monthly costs
- Enter the loan repayment period in months
- See if the consolidation loan is worth your while
- Alternatively you can enter a monthly installment amount
- The figures in orange represent the total cost plus the savings compared to current loans
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