A combination of credits changes the conditions under which several loans are repaid. Lower monthly payments, however, do not necessarily mean that the transaction reduces the total cost: if the repayment period increases, interest may weigh more on the overall financing.
In order to assess the financial interest of a grouping, it is therefore necessary to compare the situation before and after the operation, taking into account the duration, total cost and associated costs.
Key points
• Lower monthly payments do not necessarily reflect savings on the total cost of credit.
• The calculation must take into account the amounts outstanding from the current appropriations and the total cost of the new financing.
• A longer term can reduce periodic maturities while increasing the overall cost of credit.
• The transaction costs must be included in the comparison to obtain a relevant estimate.
• A grouping carried out by means of a instalment loan does not require a mortgage guarantee.
• A centralisation with a mortgage is a mortgage loan.
Start by establishing the cost of current appropriations
Before assessing the effects of a credit consolidationIt is necessary to have a precise picture of the existing funding. Comparing only monthly payments before and after the operation would give an incomplete vision.
Identify what really remains to be repaid
For each credit, the outstanding capital, the number of remaining maturities, the terms of the contract and the costs that may still apply should be increased. The main sources of information are the amortization table and contractual documents.
The aim is to determine what would cost the continuation of the various credits to their end. This value will then be used as a reference to examine the conditions of consolidation.
Do not confuse monthly with total cost
A decrease in monthly payments may mainly result from a spread of the repayment over a longer period. The amount paid each month then decreases, without the overall cost necessarily following the same evolution.
To talk about economy, we must therefore reason over the entire duration of the financing. A relevant comparison is made between the amounts outstanding in the current situation and those due after consolidation.
Calculate the cost of new funding
The same level of detail should be applied to the proposed consolidation. Several parameters may change its final cost and need to be considered together.
Taking into account all costs
The calculation should not be limited to the combined capital. Depending on the funding involved and the contractual conditions, certain costs may be added. These include:
- interest related to the new financing;
- any costs provided for in the contract;
- the cost of insurance when it is subscribed;
- any costs associated with the early repayment of existing appropriations;
- the costs of a mortgage transaction where applicable.
The total cost of the new funding can then be reconciled with the amount remaining to be paid by retaining existing appropriations. A lower result indicates a lower overall cost depending on the assumptions used; a higher result means that consolidation increases the total cost.
Review the repayment period
Duration is an essential factor. The longer the repayment is spread, the longer the interest can be borne. A reduced monthly payment must therefore always be considered in conjunction with the new duration and total cost.
The TAEG also makes it possible to assess the cost of the credit according to the elements it incorporates. It is a useful indicator for analysing funding, but does not exempt the review of contractual terms and the total amount owed.
Distinguish the forms of consolidation of appropriations
Not all clusters are based on the same type of funding. This distinction is important because it influences the structure and costs of the operation.
Grouping by way of a instalment loan
A pooling of loans through a instalment loan does not require a mortgage guarantee. The various appropriations concerned are replaced by new funding whose characteristics must be assessed as a whole.
To measure its financial effect, the method remains the same: to compare the remaining cost of existing loans with the total cost of the new loan, without limiting itself to changes in monthly payments.
Centralization with mortgage registration
When the transaction is based on mortgage credit, it is worth talking about centry with mortgage listing. It is then a mortgage and not a instalment loan with a simple additional guarantee.
This distinction is important in the calculation, since the mortgage transaction may have its own costs. These must be integrated into the overall assessment before comparing the two situations.
How can we determine whether the operation actually generates an economy?
Finally, the method is to place two scenarios on a comparable basis: to continue existing credits until their end or to replace them with the envisaged funding.
The rationale can be summarized as follows: the total amount outstanding from the current appropriations must be determined and the total amount due from the new funding calculated by incorporating the applicable costs. The difference between these two values makes it possible to identify a possible economy or, on the contrary, an additional cost.
However, this analysis should be supplemented by a review of the duration. A transaction can reduce periodic maturities while increasing the amount finally repaid. Conversely, only a full cost comparison can establish whether a global economy actually exists.
A comparison of the total funding
Assessing a grouping of credits therefore amounts to looking beyond the monthly amount displayed. The capital to be repaid, the interest, any costs, the duration and the total amount due form an inextricable whole to assess the financial consequences of the operation.
The contractual documents and detailed simulations allow for a consistent comparison of scenarios. This overall reading is essential to understand whether the consolidation only changes the distribution of refunds over time or whether it also results in a change in the total cost.
Be careful, borrowing money also costs money.