About credits consolidation

Loan consolidation

Loan consolidation, or refinancing, means paying off several old debts with one new loan. Instead of several payments to different lenders, you pay one lender once a month.

Consolidation has several possible benefits: it is easier to keep track of your finances, there are fewer separate service and invoice fees, and the new loan’s rate may be lower than that of your old small loans. But it only pays off in one case: if the total cost of the new loan is lower than the remaining amount you would pay on the old loans. So be sure to do the maths before consolidating.

Which loans can be consolidated

Unsecured debts are the most common candidates: consumer and fast loans, credit card and credit line balances, and instalment purchases. For example, if you have a credit card balance, a loan for household appliances and an instalment plan for furniture, each with its own payment date, a new loan can cover the remaining balance of all three. You then have one payment instead of three to different places.

Secured loans, such as a mortgage or car lease, are usually refinanced separately, under their own rules.

How to consolidate loans

1. Gather information about your current debts. For each loan, note the outstanding balance, rate, monthly payment, remaining term and fees. Work out how much you still have to pay on all loans in total.
2. Check the early repayment terms. In the EU, borrowers have the right to repay a consumer loan early, but the lender may sometimes charge small compensation. Include it in your calculation.
3. Compare offers. Choose one or two lenders in the catalogue that offer refinancing and suit your situation. Don’t apply to many companies at once: every check is visible in your credit history.
4. Compare the total cost. Compare not only the monthly payment but also the total amount to repay on the new loan with what you would pay on the old ones.
5. Pay off the old loans. Sometimes the new lender transfers the money to your previous lenders itself; sometimes you have to do it. Make sure all the old loans are actually closed.

When consolidation doesn’t pay off

The main trap is a longer term. The monthly payment after consolidation often falls precisely because the new loan is taken out for a longer period, while the total interest grows.

Example. You consolidate debts of 3,000 EUR into one loan at 15% a year. Over 24 months, the payment will be about 145 EUR and the total interest about 491 EUR. Over 48 months, the payment falls to about 83 EUR, but the interest rises to about 1,008 EUR — more than double. So choose a term no longer than you really need, and if you have spare money, repay the loan early.

Consolidation also won’t help if your debts arise from a constant shortage of money. If you start taking out small loans again after consolidating, you will only end up with more debt. Plan your budget so that you don’t need to borrow again while repaying the new loan.

In Latvia, lenders offering consolidation are listed in the “Debt consolidation” section. For lenders in other countries, see Credits in Europe — North & West and Credits in Europe — South & East.