Renegotiate or consolidate credits, choose the best option for you
The end of moratoriums can bring some financial pressure on your budget. It may be time to renegotiate or consolidate your credits.
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For families that lost income during the pandemic, the moratoriums made it possible, during the period in which they were in force, to obtain more available liquidity or, in extreme cases, not to lose their homes.
But the end of the moratoriums could mean pressure on the family budget. If you think you will have difficulty meeting your financial commitments, then it is time to think about renegotiating or consolidating your credits with your bank.
START BY ANALYZING YOUR BUDGET
With the moratoriums, he stopped having a monthly expense with credit installments. If you chose to stop paying principal and interest, keep in mind that the monthly installment will increase, as the interest you have not paid will add to the debt. It is now important to know how your financial situation will be with the end of the moratoriums.
So, the first thing to do is analyze your budget.
Start by calculating monthly earnings. Then add all the installments with the credits. By dividing the value obtained by the sum of your income, you obtain your effort rate, which should not exceed 30%.
In other words, spending on credit installments should not represent a charge greater than 30% of the household’s income. Any value above this level could signify a potential future default.
With your monthly income, you will have to bear all other day-to-day expenses, fixed or variable (such as food, electricity, gas, telecommunications), so the value of 30% for credit installments is considered by banks as insurance for that there is no risk of non-compliance.
If the value you got for your effort rate is more than 30%, it’s time to act.
RENEGOTIATE OR CONSOLIDATE CREDITS: WHICH IS THE BEST OPTION?
If your effort rate is over 30%, then your main goal will be to reduce it. For this you will have to reduce the monthly installment of your credits and to do this you have two options at your disposal: renegotiate or consolidate your credits.
However, there are some precautions to be taken into account. The important thing is that when contacting your bank, you present the family budget. Clearly show your income, overhead, and loan installments. Explain why you want to renegotiate credit (or consolidate) and reinforce that the objective is to continue to meet your financial obligations.
To help you decide which option is best for you, we’ve put together a simple explanation of both.
RENEGOTIATE CREDITS
Renegotiating credits means changing credit conditions to always reduce your monthly installment. There are several ways to achieve this, all with inherent advantages and disadvantages. Meet some
Extend the credit repayment period
The longer the credit term, the lower the monthly installment will be, as the loan will be repaid in more months than initially agreed. But in the long run, the total cost of borrowing will be higher as you will have to pay more interest.
Pay attention to the MTIC (Total Amount Assigned to Credit) that appears in your contract or in the proposal that will be made to you. This value corresponds to the sum of the principal and all costs associated with the loan, namely interest, bank commissions, taxes, and other charges.
Negotiate the interest rate
If your credit has an interest rate indexed to Euribor, you can negotiate the spread, that is, the value added to Euribor. The reduction in the spread leads to a reduction in the monthly installment, as well as in the overall cost of financing.
The other option will be to change your variable rate to a fixed rate. Bear in mind, however, that a fixed-rate reduces uncertainty as to the amount of interest payable, but if the Euribor drops it may no longer pay off.
If, on the other hand, your credit has a fixed interest rate, and you consider it high, try lowering the value or even negotiating a variable interest rate. In any case, always keep in mind the reduction of the monthly installment.
Negotiate a grace period
You can negotiate a period during which you will only pay interest, not having to pay the principal. This option will allow you to reduce the monthly installment in the agreed period, but in the following, it will be greater.
Change your payment plan
Credits are normally amortized over the entire life of the loan. To reduce the installment, you can negotiate the change of this amortization.
It may, for example, propose that at the end of the loan a greater part of the principal is paid off. In this way, the term is maintained, only the capital amortization regime is changed. Your installment is low, but in the end, you will have to pay a large amount of capital.
CONSOLIDATE CREDITS
If you have several credits, your consolidation can be the solution to reduce the monthly payment.
Personal loans, although of lower value, as they have a shorter term, are those that often carry a greater weight in financial responsibilities.
So, if you have several consumer credits, either personal or credit cards, consider combining them into one. Add up the amounts owed and with the bank propose the granting of a credit that allows you to settle all the credits you have.
By doing this consolidation, you will be paying a single credit to a single bank. You will pay an installment, lower than the sum of the previous ones, in addition to being easier to manage, since you only have to make one payment monthly. However, if the consolidated credit is personal, the term will not be very long.
Consolidation with mortgage
For a more significant reduction in the installment, the option may go through consolidation with a mortgage.
In this case, all the credits are converted into a single one, having as collateral a property (own or secondary housing), but with a payment term and interest rate identical to that of the housing credit.
In simple terms, if you currently pay a rate of around 10% on your consumer loans, you would pay around 1% on mortgage loans. In this way, the installment would be much lower, either due to the increase in the term or due to the significant reduction in the interest rate to be applied.
In short, if you think that the end of the moratoriums or the current economic situation could bring you problems in meeting your financial commitments, don’t delay. Analyze your budget, calculate the effort rate and negotiate solutions with your bank to reduce monthly payments.
Ultimately, if you cannot agree with your bank to renegotiate your credit, consider transferring your credit to another bank. Like many banks trying to attract new customers, you may get a more competitive offer.
