In the current general economic scenario, recourse to debt has reached high levels: there are many families (and companies) for which the balance of the monthly installment now creates many problems. Often these difficulties derive from the fact of having turned on various loans in the past, perhaps in the context of a different and more appropriate financial situation that allowed indebtedness.

The conditions have changed, they have become worse due to the economic crisis and, sometimes, due to exceptional events such as the loss of work, it may happen that the commitments taken at one time cannot be, in part or at all, more honored. It is a reality, but solutions exist. Indeed, in recent times the so-called “debt consolidation” has firmly entered, and for many reasons, among the many financial products offered by the banks.

What is debt consolidation finance

As just mentioned, it is a financial product offered by that serves to settle previous debts due to loans opened previously, often with a different credit or financial institutions. Technically it is a loan aimed at “consolidating” debts and, more generally, at rescheduling a specific (and overall) debt situation.

Given the considerable number of cases of “over-indebtedness”, the product has been very successful, also because it is very appreciated by the same credit institutions which, in fact, often offer it to their current account holders. The reason behind this trend of banks (and financial, even specialized ones) to advertise debt consolidation is soon said: given that the product makes it possible to extinguish financing also with other financial institutions, allowing a customer to compete with accessing a debt consolidation program often translates into acquiring new customers.

How Does Loan Consolidation Work?

Consider first of all that the complete re-discussion of past debts becomes a mandatory requirement of any person who has contracted more financing when the sum of all monthly installments is too high in relation to revenue. If you realize this, it is good to say a couple of things: the first is that it would have been better to realize it first; the second is that we can no longer wait. In some cases, it would not have been bad either to have been more transparent towards the credit institution of confidence in its own financial situation since, perhaps, the proposal to settle the debts in time could have arrived from the same bank manager.

However, it is quite clear that the first thing a person in difficulty needs is to make their monthly deadlines lighter. This is possible, now it is no longer a secret, proposing a loan to repay all debts to one’s bank of trust (or not necessarily to it). There are actually other reasons that can push someone to apply for debt consolidation. Having to deal with several credit institutions, and maybe even some financial institutions, is certainly something completely different from having a single contact for all the deadlines. The latter will surely be a trusted institution with which a certain type of relationship is maintained, different from the one that can be entertained with other creditors, perhaps already worn out as this happens when certain financial problems begin to appear with a certain continuity.

That said, there is no doubt that the reduction of the total amount to be paid monthly remains the most important motivation when a debt consolidation loan is requested. The operation, on the other hand, is not particularly complex since, usually, to obtain this reduction the direction is to lengthen the repayment times of the new loan. In practice, the bank will proceed as follows: it will provide the customer with a new loan with which all creditors (banks or financial institutions) will be paid while proposing at the same time more time for the return of the new loan. In this way, the only installment to be paid will be less than the sum of the individual deadlines that concerned the old loans.

Resolution for a Consolidation Debt

Naturally, in order to approve a consolidated loan, the bank will follow the same procedure regarding any other type of loan, particularly in relation to the financial reliability of the applicant and his income. A credit institution, in fact, cannot endorse situations of financial risk in terms of loans: insolvencies are on the agenda and the customer who requires a debt consolidation (like the one that requires any other type of loan or mortgage) must demonstrate their solvency and their ability to meet the installments. The above means a couple of things. The first is that the applicant must have an income level that allows the loan to be safely repaid.

In this case, the bank can, if necessary and if possible, also decide to extend the duration of the loan up to the maximum allowed, in order to obtain a sustainable installment with the monthly income of his client. The second thing is that the credit history of the customer, which results from the reports of the Risk Centers, must not present critical issues. This aspect of the possible registration of the customer to the CRIF is absolutely decisive for the purposes of granting any form of financing: if the applicant had in the past problems relating to any type of loan, or has had unpaid debts, his chances of accessing any type of credit is practically zero.

To be fair, there is a possibility linked to the so-called “cession of the fifth”, a solution that is often proposed by financial institutions when problems arise related to the figure of an applicant who is a “bad payer”. The transfer of the fifth, as we know, is a form of loan guaranteed at the source, in the sense that the payment of the installment to be paid takes place at the employer’s or at INPS in the case of pensions. The loan, in this case, can always be paid provided, of course, that the income parameters are respected.

Wondering if a debt consolidation loan is expensive or not is important. In general, it should be borne in mind that this type of financing is more expensive than purchase mortgages, while it certainly has lower rates than those of a simple personal loan. Furthermore, it could be interesting to find the financing for debt consolidation more convenient by comparing the estimates of several credit institutions: getting an idea about it, on the other hand, is not very complicated today thanks to the many online sites that deal with, in fact, of debt consolidation.

Debt consolidation, being an operation that appears to be necessary for the client in difficulty, is sometimes wrongly interpreted as a “favor” made by the bank to the customer. This distorted view of the ” debt consolidation ” product makes us lose sight of the true objectives of banking institutions when they promote the spread of this type of financing. It is true that the debtor sees the resolution of his problems with the rescheduling of his deadlines.

However, no bank has any interest in keeping the customer in a perpetual state of “insolvency risk”. The risk assessments by the banks are the basis of all their decisions on the various financial transactions and their possibilities to generate profits. To give a practical example, if a bank decides that loan repayment times can be extended, it certainly does so for good reason: its client gains a certain advantage by being able to count on a sustainable installment, while the bank has transformed a customer at risk of insolvency in a reliable one. With all due respect to all those involved, and advantages from both sides.

Steps to follow for Debt Consolidation

The procedure for obtaining a loan for debt consolidation, albeit similar to that for the request for a normal loan, has its specific features. In particular, in addition to the documentation normally requested (first of all, in terms of importance, income), all the authorizations for the extinction of the loans in progress must be delivered to the bank with the related extinguishing counts. Without these last documents, it will be impossible for the bank to proceed with the closure of all existing loans.

If the income capacity allows it, and if the bank’s client needs it, it can also be requested, with the new loan, a higher amount than the verified debts, so that it remains in the applicant’s availability additional liquidity. Very often it happens that one of the loans in progress, which will then become the subject of debt consolidation, is actually a mortgage for the purchase of buildings.

In this case, it is clear that the mortgage turned on to guarantee the original loan necessarily remains in place. As you know, however, the mortgage cannot be transferred from one bank to another (except in the case of mutual subrogation), so the best way to follow for the debit is almost one-way: to apply for debt consolidation (which, in this case, takes the name of loan for debt consolidation ) to the same bank that had provided, at the time, the first mortgage and that finally remains the beneficiary of the guarantee represented by the mortgage itself. Otherwise, the way to get the new loan could be very tortuous, or impossible.

In special cases, finally, additional guarantees may be requested for the purpose of completing the practice of a debt consolidation request: for example, starting another mortgage, perhaps on a second home, or signing one or more guarantors to guarantee the regular balance of the installments. However, remember that, in any case, the real problem to be solved remains that of the applicant’s earning capacity and the quality of his credit history.

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