With the crisis, many people have had trouble coping with all monthly payments. Bank delinquency rates rose to unsuspected quotas a few years before , going from just over 1% in 2006, to over 13% in 2013. Although in recent years it has fallen to below 9%. , it is still a very high figure, with a total amount of around 100,000 million dollars.
Within this delinquency highlights the fact that, as they say, mortgages are the last thing left to pay (or almost). And is that the mortgage delinquency is much lower, of 4.7%.
Due to this situation, in recent years, in addition to mini-loans, debt refinancing has been significantly enhanced as a way to vent family finances and allow credit payments.
What is debt refinancing
It consists of the grouping of the different debts that the person or family owns in a single loan , for which a single monthly payment will be paid. The average term of the debt is usually significantly extended, so that it is a significantly lower fee than what was previously paid among all loans.
How does it work in practice
There are mediation agencies that calculate their potential clients their total payments per month and negotiate with different banks the reunification of debts (for which they will charge a fee). Some entities can also offer this service directly to their customers.
Once the case is studied, there will usually be long-term debts (for example, the mortgage), medium-term debts (for example, a five-year vehicle loan) and short-term debts (for example, derived from a credit card).
Each one will have a capital amortized and another pending repayment, a maturity and an interest rate to be applied, and with the reunification everything will be put in the same credit ( usually it will be a new mortgage , with the guarantee of some property) .
For example, imagine that a family has the following loans:
- A mortgage of 150,000 dollars to 25 years, to Best bank + 2, of which they have paid 24,000 dollars (about five years), and they have, therefore, 126,000 to be amortized. The monthly fee is 635 dollars.
- A loan of a vehicle, of 15,000 dollars, of which they have to pay 9,000, and for which they pay a fee of 300 dollars per month.
- In addition, they owe 3,000 dollars on the credit card for a trip they made this summer. For this debt, they are paying 280 dollars, with an interest of 22%.
In total, they are paying monthly: 635 + 300 + 280 = 1,215 dollars.
They are presented with an operation in which they refinance all their credits, joining them into one (with the new loan, the previous ones are canceled).
The data of the new loan are:
Total amount: 126,000 (mortgage) +9,000 (car) +3,000 + 7,000 (formalization fees: fees, notary, registration …) = 145,000 dollars.
Interest: Best bank + 4.
Term: 25 years.
Which would leave them a monthly fee to pay 765 dollars, much lower than the 1,215 they had been paying, which will be much more relieved month to month. Where are the hits?
Disadvantages of debt reunification
One of the drawbacks that it presents is that the person / family, seeing that their fees are smaller and their finances more relieved, may incur higher expenses or new loans .
But, in addition, there is another question, and although some debts whose interest rate is higher than the new credit are reunified, a mortgage is usually also included in which we were paying less (and, in addition, it is usually the bulk of debts). And as it refinances for more years, we end up paying a lot more interest .
In the previous example, the interest we had left to pay in the initial situation were:
Mortgage: 27,120 dollars.
Car loan: 960 dollars.
Credit card: 370 dollars.
That is, we would have to pay a total of 28,450 dollars.
With the new loan, we would pay much more, since in addition to increasing our debt for the costs of formalization (in the example, 7,000 dollars), the interest payable becomes 84,600 dollars.