Consolidated Credit

A consolidated loan is a financing that allows you to merge multiple loans that you have. Usually, banks consolidate loans when contracts include mortgage loans, consumer loans, and credit cards. For example, if you have a mortgage, a car loan, and a credit card, you can consolidate all three.

If you consolidate only consumer loans, the maximum repayment period that banks offer is 7 years, and the interest rates are higher. However, if you have a property to offer as collateral, meaning you include a mortgage in the consolidation, the term can be longer.

The purpose of consolidating loans is to pay a single monthly installment for multiple loans. The total amount you pay will be lower, but the repayment term will be significantly extended. If you're having trouble paying your loans, a consolidated loan can help you avoid missing payments.

One of the advantages of a consolidated loan is that it reduces the risk of default on different loans since you only have to pay one installment instead of several. The likelihood of missing a single payment is lower. Although short-term interest rates are more attractive, extending the repayment term means you'll pay more interest in the long run. In other words, a consolidated loan provides immediate monthly relief, but may not be as beneficial in the future.

The disadvantages of a consolidated loan include the need to first repay debts, which can incur early repayment fees. These fees can be up to 0.5% of the repaid amount if you have a variable interest rate and up to 2% if the rate is fixed. For consumer loans, if the interest rate is variable, there are no penalties, but if it's fixed, the fee can be up to 0.5% of the repaid amount, or up to 0.25% if it’s the final year of the contract. Additionally, consolidating loans may involve legal fees related to the new loan contract (fees and stamp duty).