How can credit consolidation reduce my charges?

O consolidated credit is a financial product that can be very advantageous if has several contracted credits. In addition to power credit consolidation reduce your charges in times of greater financial tightness, is also a solution if you have your finances in good health. In the latter case, as a rule, those who use this type of credit intend to gain slack in your family budget to achieve a goal. However, if you are considering resorting to credit consolidation to reduce your charges, first, must be aware of how this credit works. What does it imply know why you can save a significant amount through a credit.

What is credit consolidation?

Consolidated credit is a personal credit consisting of the merging all your credits into a single loan which, as a rule, has better conditions. That is, on average, benefits from a single installment, lower than the total amount of your credit installments. In fact, through credit consolidation you can reduce your monthly installments by up to 60%.As the name implies, credit consolidation requires have multiple loans taken out. This means that in addition to your home loan🇧🇷 need to have at least two more loans contracted. As a rule, these two financing are associated with credit cardsbut can also include other type of non-purpose personal credit or car credit.In practical terms, by consolidating your credits, managing payments becomes easier, as you only have one installment to pay. Soon, reduces the possibility of forgetting or falling behind on your obligations.However, you need to be aware that to have the green light on your consolidated credit you need to meet some criteria. For example, sand is in default with any financial entity or already have your name on the Banco de Portugal blacklist, the chances are that your request will be rejected. That is, if at this moment it entered into default, first you need to settle your debts. Then try renegotiate its contractual conditions with financial entities. This solution can reduce the risk that an entity sees in the approval of its consolidated credit. If you currently have a very high effort rate, the bank may even accept credit consolidation. But be prepared for provide additional guaranteesas a guarantor or even have to opt for a consolidated loan with a mortgage. Read more: What are the criteria for accessing consolidated credit?

What is the difference between consolidated credit and mortgage consolidated?

The big difference between a “normal” consolidated credit and a consolidated credit with mortgage is that, in the latter, immovable property is used as collateral. The property used for the mortgage could be your own home, a secondary home or even a property belonging to a family member. And what is the purpose of giving a property as collateral? As a rule, pbecause it increases the probability of having your credit consolidation approved🇧🇷 In addition, consolidated credit with a mortgage gives you the possibility of saving even more on your total installments, as the interest rate applied is usually lower or may be able to extend the term of the contract. For example, in this case the reduction can reach up to 70%.However, bear in mind that if it defaults, the bank takes over the property. It is also necessary to remember that although there is a significant reduction in monthly installments with any type of consolidated credit, you must create a strategy for this savings. After all, in some cases, it is increase the maturity of some creditswhich in the long run generates a higher amount of interest. Read more: Advantages and disadvantages of consolidated credit

4 Ways Credit Consolidation Lowers Charges

1. Decrease your installments with monthly credits

When you get approval for a consolidated loan, all your installments are reduced to one. And a single interest rate is applied to this installment. For those who have several credits, mainly referring to credit cards, the interest rate applicable to the consolidated statement is much lower. Taking into account the latest data released by the Bank of Portugal, the maximum APR that can be applied to a consolidated loan in the 4th quarter of 2022 is 13.3%🇧🇷 However, many entities practice values ​​much lower than the maximum limit, depending on the guarantees, the amount and purpose of the credits and the outstanding capital. In the case of credit cards, in the 4th quarter of 2022, the APR could reach 16%. To get a sense of what you can achieve by consolidating yourWith your credits, let’s use the maximum example of reducing the value of installments: 60%. If before approval you pay 1,000 euros for all the loans, with consolidated credit, you can have a single installment of 400 euros. That is, there is the possibility to save 600 euros per month🇧🇷 Even if you don’t get a 60% reduction,and there is a 30% reduction, get one savings of 300 euros per month. This charge reduction is extremely useful for anyone who is at risk of going into default or wants to combat their over-indebtedness. In most consolidated credits you can extend the maximum term of up to 7 years.

2. With credit consolidation you gain financial stability

When you achieve significant savings with your credit installments, gautomatically take a break from your family budget. However, this time off should be well used to put your finances in order, which will allow you to achieve a long-term financial peace of mind. Thus, a goal you should set is to take advantage of part of your savings to build an emergency fund. An emergency fund should, at a minimum, cover six months of your essential expenses🇧🇷 This is a way of guaranteeing you stability in the face of income cuts or a situation of unemployment🇧🇷 However, if an unforeseen event arises, this fund can also cover these types of expenses, such as fixing your car or even unexpected health expenses. In case you have cut back on essential or important monthly expenses lately, the savings you have achieved by consolidating your credits can help you to regain that quality of life. For example, if you terminate the health insurance or you haven’t renewed essential contracts for you, this savings can help you to contract these services/products back. However, take a good look at your priorities and what is really essential for you. Otherwise, you could fall into the same spiral and lose control of your finances. Read more: Consolidated credit is not just for over-indebted people

3. Prevents the need for new credit

With a new budget slack, there can be a tendency to want fulfill some goals that he had pending due to his financial situation. For example, you might want doing work at home, renovating the furniture, investing in professional training, buying a new caramong other objectives.Although any of these examples is valid and even essential to improve your quality of life, they require minimal investment. So, most likely you want resort to new credit to achieve this objective. The problem in these cases is that just consolidated your credits to reduce the risk of indebtedness. Thus, this should not be an option to consider. Instead of resorting to a new credit, use the savings you managed to get through consolidated credit for this purpose. It is normal that take longer to achieve this goal, since you have to add monthly savings for several months or even a few years (in investments of thousands of euros). The best way to arrive at the amount you need is to know how much you have to set aside monthly. Then create a bank account for this purpose andevery month, automatically transfer (at the beginning of the month) this amount.Of course, this is not the fastest way to reach goals. But it is a strategy that it allows you to save hundreds or even thousands of euros in interest and never puts your personal finances at risk. Besides, if you make this habit, you can really start to create other financial goals that can change your future, such as savings directed towards investments.Read more: 5 safe investments to invest your money

4. You can settle debts or pay off your credit

Finally, through credit consolidation you can significantly reduce your debts. That is, in most cases, consolidated credit allows monthly savings of hundreds of euros. If you pool this monthly savings over several months, you have the possibility to amortize your credit or even settle it early🇧🇷 This is a way to get rid of part of your debts in the shortest possible time. However, if you decide to go with this option, you should check the contractual conditions of your credits well. This is because in terms of amortization there may be associated costsas is the case with commission for early repayment. However, if your financial situation allows you to pay off your credit or settle your debts, this is one of the best options you can take. Even if you can only pay off or pay off one credit, you are reducing the amount of principal owed and the interest you pay.

Let’s get down to business: real cases of charge reduction

Doctor Finance receives many requests for help to reduce charges with credits🇧🇷 When customers have several contracted credits, one of the viable solutions, or not, is credit consolidation. So, when this is not the ideal solution, it is important to know why it will not be possible to move forward with this solution.John (fictitious name) paid 1,700 euros for various credit installments. After an analysis process, it was possible to consolidate the credits and ended up paying 577 euros, in one monthly fee. That is, he got a monthly savings of 1,223 euros with consolidated credit. One more example. Joana and Paulo (fictitious names) wanted to reduce the monthly charge with their credits, as they were already having difficulties paying all installments, which amounted to a total of 2153 euros🇧🇷 After analyzing the case, the effort rate was already well above the desired, it was 67%. After consolidating the various credits (credit cards, personal loans and car loans), this couple was left with a single installment of 1084 euros, over a period of 84 months. That is, they got a monthly savings of 1069 euros. What does a annual savings of 12,828 euros.While it is not always possible to reduce your burdens so significantly, this is a solution you should consider if your budget is at risk or if you want to gain a financial break. I want to know if I can consolidate my credits