Debt consolidation is nothing more than replacing multiple loans for just one. It can be offered directly by the banks to their customers or directly provoked by them.
The next question is: but … is it worth consolidating debts?
There are several reasons that make debt consolidation quite interesting. Some of them are:
- Better organization of the personal budget, with only a monthly installment payable, instead of several installments, from several loans.
- Possibility of paying a lower interest rate than what is being paid on multiple active loans.
- Possibility to extend the deadline to pay and to have a smaller monthly benefit, which can mean a relief in the domestic budget or even imply a financial rebalance of personal accounts.
These reasons are really interesting and motivate a lot of people to make this kind of decision, but you have to have some care at this time …
Care of debt consolidation
Before making a decision like this, the person must know their real situation. It is necessary to make a survey of interest (Total Effective Cost), amount of installments and debit balance of each loan, so that, later on, it can be compared to the potential new scenario, if debt consolidation is an alternative.
It happens that many people, faced with the proposal offered by the banks, end up looking only for the reduction of the total value of the monthly installment. But they simply ignore the fact that they may be taking on a larger debt, over a longer period, paying more interest and fees.
This is what I explained in an interview I recently gave to Exame magazine (click here to read): “It is important to see the debt balance of each debt and how many installments are to be paid, as well as the sum of all the current installments before opting for modality “.
Remember that the new loan may even have lower interest rates but the fees charged may be higher making the change uninteresting. As quoted by the Exame material, “to avoid falling into the trap, it is enough to compare the Total Effective Cost (CET) of the new operation with those of the old ones”. Eventually, if you have a debt with lower CET, it should not enter into this consolidation.
Another essential measure is to look for other banks and make comparisons. Use free competition in your favor. Search! Do not accept the first offer of face, without first consulting other available options.
Also, as has been said before, it is very important that the parcel fits in your pocket
This point is especially relevant because, if this does not happen, it will be difficult to reduce the share again in the short term. Remembering that: “In longer debts, the debtor balance goes down very slowly. Therefore, the debt cannot be very long nor even have high portions to the point of compromising the budget again “(EXAME).
To conclude, as we can see, debt consolidation is an interesting option, if well used. However, as in everything involving finance, a thorough and conscious analysis is needed. How could it not be, the aid of good financial planning is very relevant!