When we have many credits, paying all monthly installments can become difficult. Putting all loans together can be one solution, but how much does debt consolidation really pay off?
In the wake of the economic crisis, many households became indebted from their loans – car loans, home loans or even credit card payments – as wage cuts and price increases made it difficult for them to repay all loans. monthly installments.
So, before defaulting on not being able to repay your credits (as happened with some Portuguese families), the ideal would be to think about debt consolidation. The monthly amount to pay is reduced and your family budget will be more relaxed. Compare the entire market so you can find what best suits your needs.
Debt Consolidation: The Case of Daniel and Margarida
Daniel and Margarida are a 50-year-old couple with a son who joined college this year, Henry. In order to provide the youngster with the best education possible, the couple took out a training loan, which they accumulated with the mortgage loan (which they have been paying for 20 years) and with the loan to buy a car requested three years ago.
The couple began to have some difficulty managing their budget to pay the three monthly installments, as well as all other expenses and costs associated with Henrique’s academic life: monthly public transport pass, food at the University and books and school supplies. .
Currently, the couple pays the following monthly installments:
- Mortgage: 466 USD;
- Car loan: 321.90 USD;
- Training credit: 111.15 USD.
In total, the exclusive monthly expenses for credit payments are 899.05 USD. For the couple, who earn 2,000 USD in net income, the effort rate is 45%. This should not exceed one third of household income (ie 33%), so the difficulty of paying Margarida and Daniel’s monthly benefits has become increasingly difficult.
The couple would have two options: either a consolidated mortgage credit or a consolidated credit with both personal loans only.
For consolidated mortgage credit, the customer should contact the financial institution that owns the loan and find out if it has this type of loan. In this, the term may be increased, but a second mortgage will be required.
Instead, Daniel and Margarida chose to consolidate both bank loans, excluding mortgage loans. With a joint debt of 15,730 USD, the market comparison made Henry’s parents realize that consolidation was an advantage. In short, the monthly installment they would be paying would be lower and, as such, their effort rate (with mortgages) dropped to 37.6%.
As for the financing of the house, in the situation of this couple makes more sense to resort to one of two options: renegotiate the credit or transfer the home loan. In this way they can achieve, for example, lower rates or longer payment periods and thus pay lower monthly installments.
Transfer home loans Know : 5 Signs That Your Debts Are Getting Uncontrolled
Sofia is 35 years old and, in addition to being still paying the funding for her MBA, she was forced to take out a car loan because she was left without her old and very old car.
This young woman pays two monthly installments to two different financial institutions: 373.76 USD for the car loan and 555.56 USD for the training credit, which gives a total of 929.32 USD.
With a net monthly income of 1,500 USD, Sofia has a 60% effort rate and, after a year of these financial burdens, realized that it was complicated for her to bear all these costs. As he did not want to be over indebted in the future, he decided to go into debt consolidation for the outstanding amount: 35,750 USD.
Thus, with the consolidation of debt, Sofia will be paying at least 645.40 USD per month, which corresponds to an effort rate of 43%. In this case, debt consolidation is an advantage that allows this young woman to have more budgetary slack and will have no difficulty in repaying her financing.
However, it is important to realize that Sofia will pay, at the end of the loan, a Higher Total Consumer Impact (MTIC) than it would if it did not consolidate debt. Even with this disadvantage, Sofia preferred to consolidate credits and have a lower monthly installment.
Discover : 4 Serious Consequences of Not Paying a Loan
Does it compensate for debt consolidation?
As can be seen from the examples mentioned, debt consolidation must be analyzed on a case by case basis. Each case is unique and, as such, we advise comparing the market to understand whether or not it is advantageous for your particular situation to consolidate the various credits.
Debt consolidation allows for better management of the household’s monthly budget. This is because, by joining all the credits, you only pay one installment every month to one financial institution.
In addition, the monthly amount payable will be lower and the interest rates will be lower. Another advantage lies in saving on bank fees, since the customer is left with only one credit from one institution and not from several.
However, and for the monthly payment to be lower, the payment period will have to be increased. This means that the total cost of consolidated credit may be higher due to the fact that the customer is ultimately paying more interest.
So, it’s all a matter of weighing the pros and cons and figuring out whether or not it pays off for debt consolidation. You should also be aware and realize that consolidated credit is a way of restoring your financial balance and not getting more financing.