The consolidation of debts is one of the most popular tools to face the “messes” that are accumulated by the use (and abuse) of plastic money and other revolving credits easily accessible to the user.
“Consolidate” is nothing more than unifying two or more debts into one. As the interest rates of the debts to be consolidated are typically high, such as 60% of the plastic money or 240% of the usurer, there is an important financial saving that could well benefit the debtor.
Imagine that Ana has two cards with balances of RD $ 50,000 each and that she only pays the “minimum”. It also has a commitment to the “reasonable 20%” of RD $ 100 thousand, to which it pays only interest.
In her first year, Ana will pay RD $ 300 thousand in interest … That is, she will pay RD $ 25 thousand a month … And she will still owe RD $ 200 thousand that generated them!
Alternatively, the debtor could access an 18% annual loan to consolidate the three debts, combining them into a single promissory note of RD $ 200 thousand.
Instead of paying RD $ 25 thousand monthly, it will face a fee, now of principal and interest, of RD $ 18 thousand. If he honors them in time, in 12 months he will have amortized all the debt and instead of paying RD $ 300 thousand in interest, he will only pay RD $ 20 thousand. Total! A saving, in other words, of RD $ 280 thousand in just one year.
Some will ask: So much beauty … Is it possible? Yes it is. Consolidation is a product commonly offered by the country’s financial institutions.
Beauty can also end in a work of terror, if before we do not answer a series of necessary questions, we modify some financial behaviors and we improve, in general, our relationship with debts.
We will share in this guide twelve key aspects to consider before, during and after consolidating your debts.
The advantages of consolidating
Apart from the obvious savings in interest to be paid, converting a revolving debt (which only pays interest) to a “forward” debt, which also amortizes capital, makes it possible to visualize a maximum date on which the note will be paid.
Unification can also help organize the debtor. Ana, instead of having three creditors with three potentially different payment dates, will now simplify her life with a single commitment.
It should be said that the consolidation process, obviously depending on the situation of the debtor and its finances, is relatively quick and simple.
Costs and risks when unifying debts
If the debtor does not prepare as we recommend in this guide, he could be risking his own financial and patrimonial health, beyond the damage already done.
As a minimum, at the time of consolidation, a bank will require the signing of a contract with a notarial contract, insurance with a specific guarantee or guarantee.
The benefits of consolidation may well justify formalizing debts in this way. As long as they are fully paid and honored!
In other words, the debtor must know that if he fails to comply, he is now risking not only his credit history, but also the properties given as collateral and others, such as his bank accounts.
Attention: The biggest risk is not to stop paying the consolidated commitments. It is rather worrying that new commitments continue to be assumed, perhaps because a pattern of disordered consumption is maintained, generating a monstrous “snowball” of debts.
I hope that whoever is going to consolidate their commitments does not underestimate the risk of getting carried away by the spiral of more consumption and therefore new debts. If it does, the salt will be more expensive than the goat.
Are there alternatives to consolidate?
Let’s go back to Ana and her “card holder” balances of RD $ 100,000. If you choose to consolidate, at 18% but to five years, you will pay a monthly fee of RD $ 3 thousand and around RD $ 53 thousand in total interest.
One wonders if Ana would be able to impose, for her own account, during one year, an austerity plan that allows her to focus on making monthly payments of RD $ 11 thousand, obviously without making new consumption in her plastics.
If he succeeds, instead of taking on debt for sixty months and committing all his assets, he would pay only RD $ 35 thousand in interest (a saving of RD $ 15 thousand compared to consolidation).
Of course, not everyone has the discipline and self-control that we require from Ana in the example, but it is valid to do the analysis. Maybe not for all debts, but for some of them.
The debtor may also ask the credit card issuer bank to cancel it and put it in liquidation or under a payment plan.
Although a significant reduction in the cost of financing could be achieved and it is obviously preferable to default or stop paying, hopefully this last alternative will be avoided. Why?
In addition to potentially having to handle several payment plans, this change implies, in banking language, a “restructuring in the conditions originally agreed upon”.
Unlike a programmed consolidation of debts, a payment agreement will be reflected negatively during a period of time in the debtor’s history, including in his credit score.
So better a consolidation to a payment agreement, although this always (always!) Will be better to a default.