### How to get out of debt, or when consolidation pays off?

Are you considering using a consolidation loan? Do not you know if in your case it will be the best solution to the problem of too high installments? We checked whether and when debt consolidation pays off.

The bank encourages you to take out a loan to repay existing loans, but you heard from your friend that it is not worth it? Well – it’s true, consolidation has its pros and cons. Instead of theorizing about its (not?) Profitability, it is worth considering its advantages and disadvantages on specific numbers.

### Case study

Let us assume that our model borrower – has two loans. He took the first one two years ago for PLN 25,000 for 4 years, so he still had 24 installments to pay (equal). He took the second loan a year ago for PLN 10,000 and 24 installments (equal to him) were also paid for him. Both debts have an identical interest rate: 10% per annum and were associated with the payment of commission in the same amount: 10%. For the sake of simplicity, we assume that the interest rate on the contracts would remain unchanged throughout the whole period of their duration, and the commission was paid out of their own pocket (ie it did not increase the gross loan amount from which interest is calculated). Interest and commission are the only costs of both obligations.

“Cash loan 1” : PLN 25,000 for 48 months

- commission: 10% (PLN 2,500)
- interest rate: 10%
- installment: PLN 6,006
- repaid capital after two years: PLN 11,529.28
- capital remaining to be repaid: PLN 13,740.71
- the sum of all interest accrued for the entire loan period: PLN 5,375,10
- the sum of interest repaid in two years: PLN 3958.27
- the sum of unpaid interest: PLN 1467.82

“Cash Loan 2” : PLN 10,000 for 36 months

- commission: 10% (PLN 1000)
- interest rate: 10%
- installment: 322.67 PLN
- capital repaid after one year: PLN 3007,43
- outstanding capital: PLN 6992,58
- the sum of all interest accrued for the entire loan period: PLN 1616.19
- the sum of interest repaid after one year: PLN 864.63
- the sum of unpaid interest: PLN 751.56

“Consolidation loan 1” : PLN 20,737.29 (PLN 6992,58 + PLN 13,740.71) for 48 months

- commission: 0%
- interest rate: 10%
- installment: PLN 525.85
- the sum of all interest accrued for the entire loan period: PLN 4,507.50

“Consolidation loan 2” : PLN 20,737.29 (PLN 6992,58 + PLN 13,740.71) for 48 months

- commission: 5% (PLN 1036.66)
- interest rate: 5%
- installment: PLN 477.47
- the sum of all interest accrued for the entire loan period: PLN 2,185.42

The initial cost of “Loan 1” is PLN 7,105.10 (PLN 5,371.10 interest and PLN 2,500 commission), and “Loan 2”: PLN 2616.19 (PLN 1616.19 interest and PLN 1000 commission), which gives a total of PLN 10551.28. That’s what would pay if he timely settled installments according to their schedules. So far, it has incurred a total cost of PLN 8322.90 (commissions and interest already paid on both loans), and there is still PLN 2228.38 to be settled .

### Consolidation costs

Due to the fact that would pay two installments every month for a total of PLN 956.73, he decided to consolidate. Thanks to the two-time extension of the repayment period, which he still had for both loans, he wanted to ease his monthly home budget. The amount of capital that he had to return under both contracts is PLN 20733,29, so he had to take out a new loan for that sum. He received two proposals for consolidation loans from the bank. The first with the same interest rate as in the case of existing loans, but without commissions. The other half with a lower interest rate, but with a 5% commission. It turns out that the first consolidation would cost him PLN 4,507.50 and the second: PLN 3222.08 . He would pay from PLN 993.70 to PLN 2279.12 for extending the repayment of debt for another two years.

### Is it worth combining debts?

In the case of ‘s credit dilemma, a thousand or two thousand zlotys for reducing the installments by almost half? It all depends on the situation of the borrower. Although consolidation is usually an additional expense, it can bring a huge advantage – it can save you from losing financial liquidity, and even save from bankruptcy.