Loan Consolidation – What it is when it does not pay to compare

by Erik Vogt

Loan consolidation, loan consolidation, debt consolidation, loan refinancing… names are many, but in all cases the same. Several loans are merged into one – this can reduce the monthly payment, simplify repayment and in some cases also reduce the interest rate.

When it pays to consider consolidating loans

Are you repaying a loan to your bank , running out of an overdraft , credit card and using a loan from a non-banking company ? During consolidation, you take one new loan to pay off all the repayments so far. In most cases, this leads to a reduction in interest rates (you pay less on interest) and a reduction in the monthly payment.

It is important to beware of any early repayment fees for any of the existing loans.

If you manage to repay all loans on time and properly, and your incentive is to “just” save, you have a relative advantage. You have time to consolidate (so you can quite calmly choose) and especially you are an interesting customer for some banks. We recommend monitoring the actions of new banks.

When does consolidation not pay off?

When does consolidation not pay off?

  1. In some cases, consolidation may result in a high interest rate loan. This risk is highest when you want to refinance credit card loans or non-bank lenders – high interest rate loans. In these cases, it is preferable to try to get a classic bank loan .
  2. If you are listed in  the BRKI debtors’ banking registers , approval of refinancing may be a problem.
  3. In the case of high debts, it is more advantageous to use an American (non-purpose) mortgage. This is a loan secured by real estate, the advantage being a lower interest rate compared to conventional refinancing.

At what bank is loan consolidation the most advantageous?

At what bank is loan consolidation the most advantageous?

This cannot be simply said, the interest rate, the amount of repayments and other conditions depend on a number of factors. The most important are:

  • Loan Amount  – During consolidation, you can either ask for an amount to fully cover your debts or get extra funds.
  • Debt structure  – do you owe your credit card, overdraft or non-bank loan overdraft? The higher the RSPN for consolidated loans, the worse the conditions.
  • Record in the register of defaulters  – people with a record in the register of defaulters pose a higher risk to the bank and therefore there is a risk of either refusal of refinancing or higher interest rates.

Most Czech banks offer refinancing. The grumpy first advises to ask for a refinancing bank that you owe the most or have the longest relationship with it.

How to apply for loan consolidation?

How to apply for loan consolidation?

You can combine loans and loans in several ways:

1. Ask the bank directly for consolidation

Directly ask your bank to consolidate loans. You tell her who and how much you owe, and depending on how much you need to borrow. The bank will ensure payment and you repay directly. Physically, you will not get the money.

The disadvantage of this method is the laboriousness of paperwork and possible unwillingness to cooperate with creditors or a new bank.

2. Take a new loan and pay off the debts yourself

You ask the consolidating bank for a new loan and repay all existing debts from the money raised.

This option is much simpler and quicker, however, the bank accesses it only for very creditworthy clients. In fact, in one moment you will actually double.

3. Take advantage of a pre-approved loan

Some banks offer pre-approved loans in internet banking or through classical letters. These are tenders created automatically for each client, often with a better interest rate and almost always with less administrative burden.

You can help yourself to get a similar offer – banks evaluate potential borrowers according to their behavior. Just increase your bank account limits and generate high sales by forwarding money from one account to another. This creates the impression of a rich client with a low risk profile.

Consolidation approved, what debts need to be repaid first?

Consolidation approved, what debts need to be repaid first?

After getting the money, pay off the debts with the highest APR (annual percentage rate of charge) first. The percentages of interest and other charges vary widely, but in general, you should repay the debts in the following order:

Loans from non-banking companies you found on the Internet, at bus stops, in newspapers, and so on.

  1. Credit Cards
  2. Overdraft
  3. Non-purpose loans
  4. Special-purpose loans

This order is indeed only indicative, it is always necessary to find out the specific APR of your debts. Where possible (credit cards, overdraft), we recommend canceling the products after repayment. First, in some cases you avoid paying a regular fee, but mainly do not succumb to the urge to re-debt.