Costs and savings potential of a debt consolidation

Costs and savings potential of a debt consolidation

 

There are different reasons for consolidating an existing loan.

For example, it turns out that, over the loan term of a home loan, the terms are more favorable elsewhere after a fixed term.

Causes of over-indebtedness

There are many reasons for over-indebtedness: indefinite reasons are most often responsible for over-indebtedness, but unemployment and illness are also often causes.

Especially problematic is over-indebtedness, if it results from an inefficient housekeeping or a failed self-employment. This is often preceded by the inclusion of more and more loans to save the company from bankruptcy. Often, the point is reached at some point where the entrepreneur can no longer service the loans and loses track of things.

Over-indebtedness may result in debt consolidation . But the reasons for this can be far more diverse.

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Reasons for a consolidation

The reasons for debt consolidation are usually always the same: Interest rate advantages are to be achieved or a new formulation of the general conditions of the loan agreement will redefine the financial leeway.

Real estate loan repayment

To finance a house usually long-term loans are needed. However, as a rule, durations of 30 years or more are not directly agreed here, but after a period of usually ten years, the borrower has the option either of completing follow-on financing with the previous bank (if the bank offers it) or of the bank switch.

Anyone wishing to repay before the end of fixed interest rates requires the approval of the bank. Also, prepayment fees are usually due so that the bank can compensate for their loss.

Debt consolidation

The current account credit, as the Dispo is correctly designated, is not suitable for long-term purchases. Due to its above-average interest rates, every overdraft on the credit side costs a lot of money.

But time and again, that’s exactly what happens: people live at the financial limit, the salary at the end is just enough to bring the dispo back to a black zero – just so that the financial leeway can be exhausted by the end of the month again. The most expensive type of account management.

It makes more sense to reclassify the credit line. For this one looks for a bank, which offers favorable conditions, gets a credit in the amount of the minus amount in the account and pays it, so that in the best case the play at the beginning of the month starts with zero and the account balance wanders into the plus. A standing order also settles the loan in monthly installments.

However, this only applies if there are no structural problems in which the system is actually used to cover the cost of living. If this is the case, consolidation brings little. Here you should possibly consider a bankruptcy.

Summarize and pay off debts

Another reason for a consolidation is the clarity – or reflect the cost here in the rule a role, since the interest charge decreases or the term is shortened accordingly. So it may make sense to combine two or more small loans by a single larger one.

Debt consolidation contract

Also, a contract can be rescheduled for the purpose of interest. This is particularly useful in older contracts, which often still work with relatively high mortgage rates. This is possible if the interest on the new loan is lower than the old one, if the old contract has no prepayment penalty, the administrative burden is limited and the term of the new loan is shorter than the old one.

This is usually the case, as building and loan associations usually allow a redemption of the outstanding sum or prepayment penalty.

Opinion on debt consolidation

Asked in 2013, people were asked, “What do you think about debt consolidation (borrowing to repay one or more current loans) as a financing option? Would this be an option for you?”

The answer was relatively clear: Only one in three can imagine a consolidation, whereas a quarter of respondents rather exclude this. At 42%, almost half of the survey respondents opposed consolidation. The skepticism about this method is so great.

This is surprising in that there are many benefits. Of course, the main selling point here is the cost.

Benefits of debt consolidation

The advantage of a consolidation is obvious: If the borrower looks after the end of the fixed interest rate on the credit market, he can choose an offer with more favorable conditions than the previous one. This saves you money. The greater the residual debt, the greater the savings potential.

But not only the pure cost aspect is relevant – also a consolidation can bring a more pleasant term for the borrower. This can be both shorter and longer, whereby the rates are adapted to the current living conditions.

If you have done everything right at the end of a consolidation, the monthly financial burden drops at constant monthly installments or a shorter term of the loan. The consolidation makes financial planning much easier.

Disadvantages of debt consolidation

If the consolidation is to take place before expiry of the fixed interest rate, the previous bank demands a prepayment penalty for the loss of interest income. Their calculation is quite complex. If the fixed interest period exceeds a period of ten years and if after the expiry of these ten years a timely notice with a six-month period is given, the prepayment penalty no longer applies.

But even then, the change of the bank is associated with costs: When rewriting the debt, the mortgage must be changed, notary fees amounting to 0.17% of the balance due. Also for other loans, it is possible that processing and agency fees for the conclusion of the loan are again incurred.

Correspondingly complex is a debt consolidation. But this is exactly what many banks rely on when offering follow-on financing.

In order to find out whether a consolidation actually makes sense in individual cases, it requires a comparison of the existing provider or the total monthly expenses incurred as well as the total costs up to the complete repayment and the option of new loans. After all, as usual, the devil is usually in the details. Here are to consider:

  • effective interest rate
  • running time
  • Option for special repayment
  • Processing and agency fees or applicable notary costs
  • credit standards
  • Assurance / equity ratio

If the interest savings are eaten up by the costs incurred, the effort for a change is worthwhile, especially if the term of the old contract is not too long.

Conclusion

Ultimately, it is necessary to check in individual cases whether it is worth consolidation. The focus is certainly on the financial aspects, which should offer an advantage in a new loan, so that the effort is worthwhile.

If this is the case, the advantages clearly outweigh, so that at least anyone who stands at the end of the term of a mortgage lending has overdrawn the Dispo long term or would like to combine several small loans, advised to check the cost advantages.

In principle, consolidation always makes sense if it results in a permanent relief of the household budget and the current installments of the loan can be settled permanently, without, for example, the must be reclaimed.

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