Renegotiate or consolidate your credits may be one of your resolutions for 2023. In fact, with the prospect of rising interest rates and high inflation going forward next year, thinking about reducing your financial burden may prove to be a good decision to lighten your budget.If your current financial situation could get worse and you are at risk of defaultdo not postpone the decision and advance in 2022. Remember that if you do not want to fail in your financial commitments, financial entities also do not want to have bad credit, so both parties will want the best of outcomes.
do math
As simple as that. In fact, without doing math you won’t know for sure how your financial situation is.To analyze your financial situation you need to know in detail not only your monthly incomebut also all the others monthly expenses.If knowing income is easy, just add up the income earned by the members of your household, knowing expenses may not be so simple, as many vary from month to month. But we can simplify. Let’s just take into account the parameter that financial institutions use: the effort rate.To calculate the effort rate, we need to know the total monthly installments that you have with your credits (including credit card if you do not have the 100% payment method) and all of your income. Afterwards, you divide the totality of the financial charges by the totality of the income and you already have your effort rate. For banks, a effort rate greater than 30% means that there is a possibility of default. So keep this value in mind. If your effort rate is close to this value, the time has come to renegotiate or consolidate your credits🇧🇷 But even if it’s still a long way off, maybe with the rise in inflation it’s a good time to consider reducing the weight of your financial charges. The monthly income has to be enough for all the expenses of the month. And these include not only the payment of credit installments, but also all the expenses of a family: food, electricity, water, gas, telecommunications, insurance🇧🇷 And if money runs out, they will be the last ones not to be paid. In other words, the first ones will be credit (with the exception of housing credit, which is really the last thing that families fail to pay).
Renegotiating or consolidating credits: what’s the difference?
Although both aim to reduce monthly installments and thereby reduce your effort rate, they are not quite the same thing. In a simplistic way, we can say that renegotiating means changing the conditions of your loans and that consolidating is joining all your credits just one. And choosing one of them depends on what you consider best for you.
What does it mean to renegotiate a loan?
Renegotiating a credit means making with the financial entity, with which you contracted this loan, new conditions for this credit so that the monthly installment of your credit reduces.
Advantages of renegotiating credits
Renegotiation can be done to a single credit without affecting others. That is, you can negotiate new conditions only for the one that has a higher performance, for example. Or the one who has a higher interest rate.On the other hand, the new negotiation may involve only one condition of your credit, but it can also cover several. That is, you can only change the credit term, but you can also add the change in the spread, the payment plan or include a capital grace period.
Disadvantages of renegotiating credits
When doing it individually for each credit, in the case of having them in different banks, it implies having to negotiate with each entity, which can be time-consuming.
Conditions you can negotiate and their impacts
Remember, when negotiating with financial entities, you can ask to change just one of the variables that have an impact on the monthly installment, or opt for a combination of several.
Negotiate spread or interest rate (if fixed)
If your credit is indexed to Euribor, you have two negotiation options: spread reduction or switch to fixed rate.As the spread is the bank’s profit margin, if you opt for this solution, as a general rule, you are asked to subscribed to another bank product, such as a credit card. Make calculations between what you earn with the reduction of the installment and the cost of the product being proposed. If you choose to negotiate the change from the variable rate to a fixed rate, the bills are also essential. You no longer have uncertainty about the installment, but this may not drop significantly. But in the case of your loan at a fixed rate, when trying to lower, they will certainly ask you for compensation🇧🇷
Extend the credit term
This is the most popular option, especially when you can’t change the interest rate.By increasing the term you will be reducing the monthly installment, but remember that by increasing the term you will pay more interest and in the end the total cost of your credit will be higher🇧🇷 that is, the MTIC (Total Amount Imputed to Credit) of your loan will be higher.
Request capital grace period
You also have the option to order, for a period, only pay interest. The installment is low during this period, but in the following, if you maintain the loan term, the installments will be higher.
Change the payment plan
This is the least used option, and it only has a real impact if the drop in yield is punctual🇧🇷 That is, if you think you only need a reduction for a short period. Bear in mind that the following installments are higher.
Consolidate credits
Consolidating credits means combine all your credits into one, leaving only a credit to pay, with a installment lower than the sum of the previous🇧🇷 Thus, you will have financial relief in your budget. And the reduction can be significant if, in the consolidation, the mortgage of a property is used as collateral. You may not, but in that case the interest rate will be higher and the term shorter than if you did.
Nocannot be in default
to consolidate credits cannot have defaulted credits🇧🇷 In other words, it cannot be on the “black list” of Banco de Portugal. Therefore, you will have to opt for this solution before your budget skids.
Advantages of credit consolidation
The biggest advantage is handle only one credit🇧🇷 You no longer have several installments to pay (and eventually with different payment dates) to have just one. On the other hand, you can benefit from a lowest interest rate and a longer payment term if you decide to consolidate into a mortgage loan.
Disadvantages of Credit Consolidation
In addition to not being in default, will take out a new loan and, therefore, is subject to the rules and assessment of credit granting by banks. Therefore, if you consider that your effort rate is already excessive credit consolidation may be refused, as they consider that even if you combine them all into one credit, you will not be able to pay the installments.
Two ways to consolidate your credits
on a personal credit
If you combine all your personal and credit card credits into one personal credit, you can pay a monthly installment lower than the total of the previous ones, but the term will not be very long and therefore the installment may still be high, even with the maximum rate defined by the Bank of Portugal.
on a mortgage
If when consolidating your credits you own a property, whose mortgage can be given as a guarantee of payment, this will be considered as a mortgage loan and will be subject to the same rules as mortgage loans. Ie, will have a longer term and a lower interest rate🇧🇷 Remember that this will be the lowest because by giving the property as a guarantee of payment, the bank will be ensuring that it will be paid. You still have to take out life insurance.Also read: Do you know the various types of credit that exist?
How to choose between renegotiating or consolidating your credits?
Choosing between the two options for reducing your financial burden depends on your specific case. So, before you decide, keep in mind some factors of your credits.
Loan terms
If there is many loans close to being fully paid offcredit consolidation may not be the solution. The installment of your loans is made up of interest and principal, with the interest portion being much larger at the beginning of the loan than at the end. This means that, towards the end, he has already paid almost all the interest on them and is only paying principal (see payment plan to confirm). Therefore, when consolidating them you will join them to longer credits and pay new interest on the same amount🇧🇷 All things considered, you will pay twice the interest on that amount. You can choose the credits you want to consolidate, but perhaps the reduction in the installment is not what you expected. that these small credits end, because afterwards these installments disappear and your effort rate drops🇧🇷
interest rates
You should analyze the interest rates of each loan. Do the math: if the consolidation interest rate is higher than the normal interest rate on most of your loanscredit consolidation does not pay off.
Hire and trade only with regulated entities
Do not take out loans from financial institutions, or ask for help in consolidating credit from financial intermediaries that are not duly registered and regulated by the Bank of Portugal.
A professional writer by day, a tech-nerd by night, with a love for all things money.