A person’s economic situation is subject to many variations over time. For some, it may improve, but for others, unfortunately, it can get worse. In the event that, given the previous resources, there are different loan repayment installments to be supported and the economic resources go towards a dangerous decline, inevitably we will find ourselves looking for the best solution that allows us to respect our financial obligations. And soon, most likely, we will find ourselves considering the possibility of using debt consolidation.
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Payday loan consolidation is a financial product that, said in a very simple way, allows you to request a new loan that will pay off all previous payday loans and that will, therefore, allow you to pay a single recalibrated installment based on the current economic situation- additional hints.
Although in many cases, it can be a solution with many advantages, it cannot be deceived that there are no side effects. Being a product, as such, it is sold. And as each sale provides a gain for the seller, so each request for debt consolidation provides a gain from the bank that grants it, with consequent costs and disadvantages for the applicant. This article will try to highlight the main disadvantages.
FIRST REASON: ALL INITIAL EXPENSES ARE LOST
Every time a loan is obtained, it must be considered that in addition to the sum to be repaid, there will be additional costs, or preliminary investigations, which are added to the interest.
The main categories of expenses are as follows:
- costs for opening the file: for each credit institution, the opening, and management of a case has a cost. Starting from the time and service of the operator up to the checks made through various agencies to assess whether you will be able to return the loan. These costs are defined both on the basis of a percentage of the total sum and on the basis of a fixed expense. Needless to say, they fall to the loan applicant in the event that the loan is accepted.
- installment fees for the installment: it is a cost that is added to each installment paid. The entity and the application are decided directly by the credit institution.
- loan insurance: it can be either mandatory or optional. This insurance is designed to protect the applicant in the event that he is effectively unable to repay the loan. The insurance can guarantee the payment of a limited number of installments in case of temporary problems, such as a health problem, or can cover 100% if the insured dies.
All these costs are calculated when the loan is requested. So if you want to resort to debt consolidation, you should be aware that all ancillary costs of previous loans will be lost. Furthermore, the ancillary costs of the new consolidation loan will have to be covered.
SECOND REASON: IT IS NOT GRANTED IN SITUATIONS OF EXCESSIVE DIFFICULTIES
This may seem like a contradiction, but although debt consolidation is designed to help those in difficulty with loan repayment, if two or more installments have not been paid it is very likely that it will not be granted. This is because being a real new loan, debt consolidation also needs a guarantee that it can be repaid. And if you have not been able to return the previous ones, how can the bank be sure that you can repay this? These conditions imply that the debtor foresees an imminent inability to be able to pay the installments in advance. Obviously, this is not always possible. Then you will have to resort to other types of consolidation that have been made available by new laws. But the further you go along this path, the greater the difficulty of receiving the new loan.
THIRD REASON: INTERESTS
The basic concept is simple: the more the number of installments increases, so the repayment time, the more the interest increases.
All this depends mainly on the method of calculating the installment, which is the so-called “French” method.
This installment will consist of a share of interest, which will decrease constantly, and a capital share, which will increase constantly.
The following table shows the trend of debt repayment of 10,000 euros in 6 bi-monthly installments of 1,735.38 euros with an interest rate of 7%.
|N ° of RATE||SHARE CAPITAL||QUOTA INTEREST||RESIDUAL CAPITAL|
The result is that in all the previous loans a large amount of interest has been repaid in proportion to the capital. So most of the capital is still to be repaid. And it is precisely this capital, and not the interests, that will be reintegrated into the debt consolidation loan where, in addition, the installment will be calculated with the same “French” method.
All of this will involve a considerable loss of money.
FOURTH REASON: POSSIBILITY OF NOT BEING ABLE TO PAY AGAIN
There is a very serious possibility: the inability to pay the new consolidation loan.
Previously there were many small loans with many installments.
But there were two advantages:
- taken individually, the loans were small.
- as of little magnitude, probably no guarantees had been given
Now instead we find ourselves with a considerable sum and with goods given as a guarantee in the case of non-payment.
Credit institutions, which type of loan are most interested in recovering? It is very likely that it is the debt consolidation loan as it is more conspicuous and requires collateral.
So not only will you have lost money because of the reasons listed above, but you will risk having to resort to another financial product that will have new costs.
In situations of economic difficulty, it can be easy to get caught up in worry and make a hasty choice among all the various solutions that can be proposed by the credit institutions. As we have seen, debt consolidation can also be an excellent ally or another obstacle to overcome. Therefore it is much wiser to make a careful evaluation of the advantages and disadvantages of each proposal, considering that depending on the choice many economic resources can be saved.