We live accustomed to a lifestyle that pushes us to consume constantly. It does not matter if they are products, services, or simple house receipts, the expense is always present. Eventually, in addition, this expense can be made through credits, acquiring something today, and paying it through installments for a while. This debt that is acquired, can go out of control little by little until having many monthly payments. At the time that there are many payments and the debtor cannot face it, there may be mechanisms to mitigate the effects. One of them is to reunify debts, that is, in a single monthly payment, with more comfortable installments.
This article is intended to explain the advantages and disadvantages of reunifying debts. Also how to learn to calculate when this decision is advantageous for us and can give us a break in our economy. In the same way, learn when this solution is not suitable, and above all to prevent it so that it does not happen again. We hope it helps you.
What does it mean to reunify debts?
Reunifying debts refers to the acquisition of a money loan whose objective is to pay all the remaining debts, leaving the new loan acquired as the only payment. It is a mechanism that serves both simplify payments, as if to ease the financial burden. When adding them all, the intention is to reduce the resulting monthly letter, pursuing the lowest possible interest on this new loan, as well as more years to pay it.
Why reunify debts?
As we said at the beginning of the article, the reunification of debts is the best way to unify in a single monthly payment all those letters that come in a dispersed way. However, the purpose behind this reunification is not so much to minimize the number of debts, but to reduce the total fee.
Reunifying debts can help us both decrease the total amount we pay at the end of the month how to decrease the interest we pay. On the other hand, a common practice is to extend the time to pay that debt, which means that if we increase these payments for many years, the interest paid at the end will also be increased. So, in these cases, how should one act? Let's go to see some examples so that it is better understood.
To reduce the interest of those debts with high interest
A good practice in handling this reunification would be that after reunifying the debts the interest is as low as possible. Now, it may be that the interest on this "new debt" may be higher than the interest that is being paid on any of the debt / s that are owned. In this case, it would be quite unwise to opt for this option as long as there is solvency to pay. It could only be justified to pay higher interest on new debt if the monthly payment is actually much lower. Let's see it with some examples:
We have 3 cases, A, B, and C. Suppose there are 3 different people, and that all of them seek to reunify their debts. In all 3 cases, they also find a loan that they can access and whose payment will be of 7% interest annually. It is also flexible in time, it can last 2, 5 or more years. That loan may be enough to pay as many bills as they want, so the 3 people get to evaluate how much it suits them.
- Case A: In case A, you know that paying 7% interest is better than paying 18 and 12%. However, it has letters at 5 and 7%. If you intend to lower your installment, and the maturity of these installments is less than the maturity of the new loan, you could reduce those payments with the new credit by having more years to pay it. In the case of 5%, you should pay a penalty of 2% more in interest, something that you should take into account if it is in your favor. The other debt of 2% would not make much sense to unify it, since the interest is low, unless your personal context "forces" you to do so.
- Case B: One debt at 8% and two at 13%, both could be unified with the new 7% loan without problems, it would benefit. In the case of the other two debts, it would not make sense to pay more interest.
- Case C: Similar to case A. If the new loan is 7%, you have two debts at 8% and 10% that would be interesting to unify. The other two debts at 5% and 6%, it would make sense if your payments suffocate your personal finances and you can extend the payments with the new loan. Of course, paying a higher interest. 0% debt wouldn't make much sense.
Disadvantages of unifying debts
We have seen the benefits of reunifying debts, the monthly payment decreases. However, there are or could be some underlying problems. We will detail them below.
- Total Interest Payment. The more the loan maturity is extended, the total amount paid in interest increases. In addition, that makes that spiral to get out of debt lengthens in time.
- Commissions. Many times, canceling loans usually carries some cost (if they are low costs of 1%, they are very little noticed). The important commissions usually come in the opening of the new loan. Beware of them.
- Guarantees. The previous loans may not have required many guarantees, and hence the high interest rates. But the larger the loan to request, the greater the guarantees that they will ask for. They can even be from our own home).
- Re-apply for credits. Often when the payment fee decreases, we can see that we have room to allow ourselves that trip (for example) that we wanted to do, and that we can pay in comfortable installments. Error! Do not fall into that temptation, or else, not only will we return to the previous situation, but in this case the total debt will be larger and difficult to manage.
Important. Reunifying debts is a double-edged sword. It can give us a second chance to try to get out of the difficult economic situation that we find ourselves in. If we are not disciplined, and continue to incur debt, it can lead us to a worse situation. A situation in which we no longer have room to maneuver and we are trapped for many years in a debt from which we cannot escape.