Loans have become an important part of Finnish private households. In recent years, unsecured loans, also known as consumer credit, have become the most popular form of loan. Getting loans is easier than ever, which is why many have multiple loans to pay. Recently, new loan services for changing needs have also entered the market. Loan consolidation is one of the most popular new loan services. Easily combine loans if you want to get rid of extra borrowing costs.
It is a clear fact that unsecured loans are usually more expensive. When no guarantee or security is required for the loan, the lender then takes a higher risk. This is also reflected in the interest rate, which usually varies between 8% and 35% depending on the size of the loan and the repayment period.
There are certain situations where loan restructuring is a sensible solution to reduce costs. In this article, we will take a closer look at these.
What is the purpose of loan consolidation?
There are two ways to combine loans:
- Renegotiate loan terms with your current lender
- Applying for a new loan from another lender
Please note that loan restructuring, regardless of the method, has, after all, a fairly simple goal: to reduce the cost of borrowing. By merging, you will get better loan terms for your loans as a whole. When it comes to borrowing money, it means that the loan will basically get cheaper. In certain situations, combining loans can also meet everyday financial challenges, but here we look at how it can help save on borrowing costs.
There are several ways to combine loans. When working with a bank, the goal is usually to get a better negotiated interest rate on the remaining portion of the loan. Sometimes the bank that originally granted the loan may come up against this. In some situations, however, the borrower has to turn to another financial institution to save money.
Note that when merging loans, you need to compare the current terms (how much the loan will pay if you keep it as it is) with any new terms (how much the loan should pay with the restructuring).
Choose to combine loans when you have taken out more consumer loans
As stated at the outset, an unsecured loan is generally an expensive solution. The price will rise especially high if more loans have been taken out. In this case, you pay at least twice the amount of loan interest and costs. When a debt is made up of many small loans, it is especially advisable to restructure it.
This is because the interest rate on a consumer loan is determined by the amount of the loan and the repayment period. In addition, the horizontal cup weighs on a personal credit check that the applicant must pass. As a rule of thumb, the fewer loans, the shorter the loan repayment period and the higher the interest rate. The bank also has to make money from its business, and in the case of shorter-term loans, the interest rate is the factor that guarantees productivity.
Loan restructuring is also worthwhile if you pay more than one consumer loan. By combining loans, you save on double costs in terms of various payments. For a larger loan amount, it is probably easier to get a better interest rate. The example below illustrates how loan restructuring helps save money in a situation where multiple loans are due.
Situation 1: Three small loans
Laina 1
- Loan amount: 1,500 euros
- Loan period: 3 years
- Effective interest rate: 22.34%
- Opening fee: 4 euros
- Costs, expenses and fees: EUR 515.70
- Total cost of the loan: EUR 2,015.70
Laina 2
- Loan amount: EUR 3,000
- Loan period: 4 years
- Effective interest rate: 12.75%
- Opening fee: 3 euros
- Costs, expenses and fees: EUR 796.70
- Total cost of the loan: EUR 3 796.70
Laina 3
- Loan amount: EUR 1,000
- Loan period: 2 years
- Effective interest rate: 26.82%
- Opening fee: 0 euros
- Costs, expenses and fees: EUR 269.00
- Total cost of the loan: EUR 1,269.00
The three loans include miscellaneous expenses and charges totaling EUR 1 581.40. Let’s see what happens when you decide to combine loans into one larger loan.
Situation 2: One consumer credit
Laina 1
- Loan amount: EUR 5,500
- Loan period: years
- Effective interest rate: 9.96%
- Opening fee: 4 euros
- Costs, expenses and fees: EUR 1 1 37.20
- Total cost of the loan: EUR 6 637.20
Combining the loans would have resulted in savings of EUR 444.20 or almost 30% compared to the original borrowing costs. With the simplification of loan repayment and the shortening of the loan period, the savings would have been even greater.
Choose to combine loans when you have credit card debt
Credit card debt is unfavorable for two reasons:
- Credit card debt often has a high interest rate (typically between 25% and 35%)
- In principle, credit card debt can be postponed indefinitely
Although credit card debt is similar to consumer credit in many ways (it is also unsecured debt), getting rid of this type of loan is perhaps even more difficult. Credit card companies offer a type of Flexible Credit that can be paid with an invoice for a minimum amount from month to month. In this case, interest accrues each season and, in the worst case, it eventually drives into a debt spiral.
The interest rate on unpaid credit card debt – money you don’t repay at the end of an interest-free credit period – is often even higher than on consumer loans. Therefore, you should almost always opt for a loan restructuring if you have credit card debt. This is especially true if you have credit on more than one card. Combine loans easily and quickly if you want to avoid extra interest.
By combining loans, you can get your personal finances in order better. You can reach under a single loan company that will make sure that you pay back the loan on a monthly basis. Combine loans easily, and the road to debt repayment becomes easier to navigate.
Choose to combine loans when you have had a loan for a long time
In the latter situation, the possibility of restructuring must at least be considered. The strategy may not work, but it should be tried regularly. The third situation where a restructuring may come into play is when you have had a loan for a long time.
Many things can change during loan repayment. Your income may increase, the interest rate market may change, and you may get rid of other debts that contributed to your credit rating when you applied for consumer credit. Your personal finances are by far the most important factor when calculating interest on unsecured loans.
If your situation changes, it is important to check to see if this may affect your loan terms. For example, if your income goes up, it means higher security for the lender, which in turn means lower interest rates – at least in most cases.
There may also have been general changes in the fixed income market. More and more new lenders are entering the market, and while the FSA has tightened its lending practices, this means even tougher competition. As always, this is good news for those considering a loan. Easily combine loans in the way that works best for you.
Easily combine loans – that’s how it works
Once you have decided to consolidate your loans, it is especially important to have an overview of what your debt situation looks like at the moment. How much will the loan or loans cost if you keep them current? This is the amount you need to keep in mind as you begin to explore loan consolidation opportunities.
Once your current situation is clear, it’s time to talk to the lender. Can it provide an opportunity to renegotiate loan terms? If this is not possible, you can turn to other actors. The easiest and most time-saving way to find the best options is to take advantage of a refinancing loan comparison site.
If you end up changing lender, you can just take a new loan for yourself and use it to pay off your current debt. Combine loans easily – many lenders are happy to help their clients with this process. Seizing the opportunity to combine loans can be a step in the right direction towards saving and ultimately complete debt-free.
