How debt consolidation works

It facilitates the payment of multiple loans. However, it involves a considerable cost and is only recommended in very specific cases.

Debt consolidation consists of grouping together all the loans and mortgages we have contracted into a single loan. This way, we will only have to deal with the payment of a single monthly installment, the amount of which will be less than the sum of the different installments we had to cover previously. That is, debts are gathered together to considerably reduce what we pay each month, at the cost of increasing the repayment term and, therefore, the final cost of the operation due to the interest charges.

This method of dealing with the repayment of our debts can be managed by specialist companies, known as mediators, which allow us to combine any loans and mortgages we have with different banking institutions or with different interest rates. You can also group the debts together through a banking institution with which we have the largest number of loans or mortgages outstanding. Let's now take a look at the consolidation process, its expenses, advantages, disadvantages and requirements.

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How to go from paying several monthly installments to only one

The path to consolidating our debts is not especially complicated, although it does require our case to be studied by the mediator company. This company will analyze our debts, the interests we are paying and the repayment periods we have ahead of us, in order to start negotiating the new repayment conditions with the different banking institutions once the operation has been approved.

When the process is underway, all our loans and mortgages will be cancelled to combine them into a single mortgage with the new conditions negotiated beforehand. This new mortgage will be for the total of our outstanding debts and will have both a new interest rate and a new repayment period, usually longer to thus reduce the monthly installment we will have to pay.

What expenses debt consolidation involves

Combining our debts into a single debt entails a series of expenses that should be taken into account, besides the interest cost we have mentioned previously.

  • As the consolidation involves the early cancellation of all our loans, we will typically have to pay the usual cancellation or early repayment fees.
  • On the other hand, to combine our debts we must arrange for a new mortgage to be set up, with all the associated expenses that this involves, such as the mortgage set-up fee, the costs of valuing the home or property being mortgaged, Stamp Duty and notary fees.
  • Last of all, if we decide to manage the consolidation of our debts through a mediator agency, this agency will charge its own fares; on the other hand, in the event of consolidating our debts through our own bank, it would not usually charge fees for the debt consolidation operation.
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What requirements are asked for to consolidate debts

There are several conditions that must be met for us to be able to carry out the consolidation of our debts. The first is that we cannot choose to combine some debts and not others: we must group together each and every one of the loans we have under a single mortgage.

Then, the second most common requirement is that the amount of this new mortgage must not exceed 80% of the value of the mortgaged property. This provides an additional guarantee to the entity we hold the debts with, although they usually also ask us for the usual requirements that apply to the granting of any mortgage: stable and demonstrable monthly income, not being included in a list of payment defaulters and presenting a guarantor that backs us up.

Although consolidating debts will significantly reduce the monthly cost of our loans, it will also increase it in the long run. Therefore, we should analyze all the costs we will have to cover during the consolidation process very carefully, as well as the final expense that will result from having prolonged the repayment of our loans.

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