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Financial Dictionary - Pooling debts
Pooling debts
Just having debts with various creditors can sometimes be worrying. That is why there is an option to combine or pool our loans into one. This results in a single monthly payment that is smaller than the total of the instalments on all the separate loans. This is possible because it increases the repayment period (i.e. the total final cost), generating more interest.
Debt pooling is usually performed by a specialist agency or broker, although it can also be done through the bank with which we arranged most of the debt.
What are the requirements for applying for debt pooling?
In addition to the bank's usual requirements when arranging a mortgage (monthly income, not being on debtor lists, guarantors, etc.), the following conditions must also be met to apply for debt pooling: pooling of all loans (not just some), not exceeding 80% of the value of the mortgaged asset.
What is the process?
Although pooling is not complicated, it first requires a study of our specific case, analysing our debts, interest payments and repayment period. Those loans can then be repaid in advance, negotiating new payment terms with the debtors.
Once the process begins, all of our loans are combined into a single loan, with new terms: a single, smaller monthly payment; a single interest rate and a single repayment period (this time longer).
What are the advantages and disadvantages?
As always, debt pooling has its pros and cons, which depend on each case.
Obviously, the main advantage is the convenience of combining all payments into one smaller instalment, and doing this easily with no red tape.
But we have to consider this option carefully, as it is more expensive in the long run. First, we will have to pay the broker's fee. Although we do not have to pay this at once, it will ultimately be waiting for us. We also have to add the costs that will arise from the early repayment of the loans we have arranged, and any other costs from arranging the new debt: arrangement fees, etc. Finally, if the pooling includes a mortgage (as is usually the case), a new one will have to be arranged, which will have its own costs: appraisal, notary public, stamp duty, etc.
In summary, exhaustive analysis of the costs is required before we dive in.