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Differences between consolidating and renegotiating credits

When you have to reorganize finances Credits can be important financial management tools, provided they are well managed. Given the ease of access to finance, however, it is not uncommon for cases where miscalculated or unexpected situations (such as unemployment, for example) give rise to financial problems. In these cases, the effort rate of families becomes unbearable and the only solution is, precisely, to consolidate or renegotiate credits.

Therefore, if you expect that soon you will no longer be able to fulfill your obligations to your bank, we advise you to consider one of these two alternatives, even to prevent a possible situation of over-indebtedness from getting worse. Remember that, at the limit, over-indebtedness may lead you to have to declare personal insolvency, a process that has several serious consequences.

Before opting for any of the solutions – consolidating or renegotiating credits – it is important to understand what distinguishes them, even so as not to take a false step.

Consolidate or renegotiate credits: what does consolidation consist of?

One of the main advantages of consolidating credits is the fact that it allows considerable budgetary slack at the end of the month. That is, as it consists of joining all credits into one, you start paying (only) a single monthly installment, lower than the sum of all individual installments, on a single payment date. In addition, you may see the average interest rate reduced, especially if you have several short-term credits.

It is important to know that the monthly installment is lower than what you currently pay with several credits because the credit payment term is extended over time. The total cost of credit will indeed cost you more, but the main function of consolidation is precisely to provide you with more monthly liquidity.

As an example, let’s consider that, in addition to the home loan, you are paying a car loan, a personal loan, and credit cards. Dealing with all these expenses can be a real challenge at the end of the month, which is why consolidation can be advantageous.

However, it is important to know that it is necessary to meet a set of conditions to be eligible for this credit.

Consolidated credit requirements: find out if you are eligible

To be able to use consolidation, you must meet the following conditions:

  1. You cannot have overdue credit installments. The ideal is to settle your debts first before talking to the bank about credit consolidation. If you are unable to pay the arrears, it is best to try to renegotiate the debt.
  2. The maximum age to apply for credit consolidation is 75 years old.
  3. To negotiate the consolidation of credits it is necessary to have a guarantor or give a guarantee to the bank – for example, mortgage your house.
  4. If you are unemployed, in a precarious employment situation, or if you are considered a risky customer (with a high effort rate, for example), the bank is likely to refuse your request.

 

Please note that conditions and requirements may vary, depending on the financial institution.

The debt renegotiation

If you are unable to contract a consolidated loan with a financial institution registered with the Bank of Portugal, you have only three alternatives. The most obvious, ie paying the installments in arrears; using credit from individuals, or renegotiating credit with your bank.

Regarding renegotiation, you must know that the bank is not obliged to do so, but still, do not fail to request it. Talk to your account manager about this.

By Decree-Law no. 227/2012 of 25 October, Banco de Portugal provides support mechanisms for citizens who are at risk of indebtedness or already in a situation of default, namely PARI and PERSI.

The PARI (Action Plan for the Risk of Default) is a prevention plan that concerns the risk of bank default and provides a set of procedures to monitor the implementation of credit agreements and the management of risk situations. Some of these procedures are as follows:

  • Extension of deadlines;
  • Reduction of interest rates;
  • Grace periods, among other possibilities.

 

The PERSI (Extrajudicial Procedure for Regularization of Default Situations) is another of the support mechanisms available and aims to prevent the customer and the banking institution from having to refer the case to court, avoiding bureaucracy and thus ensuring greater agility in the process. of credit renegotiation.

As with PARI, the bank will present you with an internal consolidation proposal, with specific conditions to face your banking problems.

According to the information made available at Banco de Portugal, it is the creditor entity that is responsible for initiating the PERSI and is obliged to do so:

  • As soon as the client requests it;
  • Between the 31st and 60th day after the customer is in default;
  • When the customer is late in paying the installments, and if he has already alerted the bank to the risk of default.

Although the credit renegotiation process is not exactly simple, this is perhaps the best way to regain control of your finances.

Other support mechanisms to consider

At the same time, you can also find a network of entities, whose mission is to advise and monitor cases of over-indebtedness.

1. Support Network for Indebted Consumers (RACE)

The Support Network for Indebted Consumers (RACE) is an extrajudicial support mechanism, with free access, which provides information, advice, and support to consumers at risk of indebtedness or already in a situation of default.

2. Consumer Debt Guidance Office (GOEC)

GOEC is part of the Support Network for Indebted Consumers (RACE), being financed by the Fund for the Promotion of Consumer Rights. This Office is the result of a partnership between the Consumer Institute (currently Directorate-General for the Consumer) and ISEG, providing the entire service free of charge and exempt. It provides training, awareness-raising, and monitoring of indebted families in the search for solutions.

3. SUPPORT

APOIARE is a non-profit association that provides support in terms of technical assistance specialized in indebtedness. Here, all services are provided confidentially and free of charge.

4. DECO

The Portuguese Association for Consumer Protection (DECO) can also help through the Support Office for the Over-indebted.

This support program will provide you with information and advice, both in terms of managing the family budget and negotiating with creditors.

Therefore, on whether to consolidate or renegotiate credits, it is important to evaluate your specific case. Bear in mind, however, that if you are already in a situation of default, that is, if you already have installments in arrears, you will not be able to resort to consolidation.