What is a consolidation loan?
A consolidation loan is a combination of several debts into one. A bank that provides such a service usually buys customer liabilities, which from then on repays installments to one lender instead of several. As part of a consolidation loan, you can combine, for example, cash loans, installments for a car or other equipment, credit card debt, etc. In Poland, consolidation loans offer virtually all major banks as well as many private companies specialized in this type of services (so-called parabanks), which operate on the basis of regulations other than banking law. Consolidation of the loan, in addition to combining several liabilities into one, also means a reduction of the monthly installment and a significant extension of the repayment period, so that the total amount transferred to the lender exceeded all liabilities with a commission added for the service. The amount of commission varies depending on the bank, the client’s credit history and the amount of the liability and the repayment date. A consolidation loan takes various forms – it can, for example, be repaid in equal or decreasing installments (incremental installments do not apply), or offer additional services, eg increase the loan amount by additional cash, which the customer can use for any purpose. See hsalliance.org for an example
Advantages of consolidation loan
The consolidation loan is attractive primarily for those people whose income is not enough to cover all monthly liabilities. By lowering the monthly installment, paying off debts may become less burdensome for them and at least temporarily facilitate the planning of the household budget. An important advantage is also simplifying the settlement – instead of several installments with different repayment dates, which should be transferred to different accounts, after consolidation we deal with one installment and one creditor. Some lenders even allow automatic repayment of receivables, so that the client does not have to remember about it at all. The advantages of consolidation loans also include high competition on the market, thanks to which advantageous offers are not uncommon and there are often very attractive promotions.
Defects in the consolidation loan
The biggest disadvantage of a consolidation loan is its cost. As part of the consolidation, it is spread over time, but as a last resort, the borrower will have to pay much more for him than in the case of regular repayment of consolidated receivables. The disadvantage is also the calculation of the total cost, because although banks provide installment calculators, they rarely include all additional fees. What’s more, in the case of most consolidation loans, the interest rate will be variable, which means the possibility of increasing the service fee. A significant drawback of this solution is also the significant extension of the repayment period. The longer we pay off the loan the higher the risk of losing financial liquidity before settling the receivables, and this can mean serious consequences, also falling into the so-called spiral of debt.