What are the goals of consolidation?
There are several goals that can be pursued with consolidation:
- Equalization of repayment charges for the purpose of liquidity relief
In simple terms, a borrower has more money available monthly if he combines several loans and extends the term.
- Securing a low long-term fixed interest rate
Short-term loans can often be associated with high-interest rates. By consolidating into a loan, the total credit costs can be lowered by lower interest rates.
- Improvement of the balance sheet
Companies can improve their balance sheet by consolidating liabilities. This will make them more attractive to investors and investors again, which in turn can lead to an increase in equity and more investment and growth.
- balanced budget
With the help of consolidation, states, municipalities or cities can balance their budgets. In this way, the new debt decreases and the corporations work more economically.
- Consolidation as part of a rehabilitation phase
If financially troubled companies are rehabilitated, a consolidation leads to pooling the financial possibilities. However, personnel reductions are often associated with this.
Consolidation of loans
When liabilities to third parties are consolidated in the form of loans, debtors usually have the option of deciding on consolidation beforehand or retrospectively.
For example, consolidation options can already be defined when concluding a loan agreement with a short term of up to 24 months. In principle, it is always possible for a debtor to consolidate his loans at a later date. The prerequisite is that he finds a financing partner.
Subsequent consolidation is usually the goal if many different loan liabilities exist, which severely limits liquidity. For borrowers, a consolidation is advantageous if, on the one hand, the lending rates fall and on the other hand, the monthly burden of the installments decreases. At the same time, consolidation contributes to sounder financial planning.
A practical example
They have taken out a total of four loans with a maturity of 48 months each with a total volume of 30,000 euros. The remaining debt is 20,000 euros. The monthly total charge for the coming months is more than 500 euros. This will significantly reduce your monthly available capital. They, therefore, decide to consolidate the loans, so to repatriate. For this purpose, you take out a loan in the amount of your remaining debt of 20,000 euros, but divide the installments to a term of 84 months. Your monthly installment will drop to just under 250 euros. In this way, you will be available monthly again almost 250 euros more.
In Germany, there is no specific, legally binding regulation for consolidation. Usually, the consolidation is usually in the form of the so-called “novation”. This is the replacement of old debts by a new debt. The old obligation is thus “renewed”.
By taking out a new loan, the old debts are automatically repaid. One possible basis for novation is provided by paragraph 311 of the Civil Code.
It follows that existing credit collateral is no longer valid, but the collateral must be recalculated.
This is how a consolidation of loans expires
In private or corporate practice, consolidation is usually the same as rescheduling. A new long-term loan agreement replaces several short-term loans. Companies often have the additional option of consolidating in the form of bonds.
For households, rescheduling can take place as follows:
- You compile an overview of your current loans and calculate the total loan amount as well as the total monthly charge.
- Check which monthly charge you want to achieve by rescheduling.
- Then use a loan calculator to find a cheap loan. Enter the desired loan amount, the duration or the desired rate there.
- Compare the offers of the individual banks.
- Then submit the loan application to the bank with the best offer. In the application, you can specify all loans and the respective banks as well as bank account numbers, so that the new lender can immediately replace all liabilities for you.
Check creditworthiness in advance
When making a credit inquiry, consider that you need to have enough credit to reschedule into a single larger loan.
Consolidation on the stock market
When talking about consolidation in the context of the stock market, this term refers to a particular phenomenon, which occurs especially after high requests and thus rapidly rising prices.
The value of equities is largely based on the interaction between supply and demand. As demand for certain securities increases, so does their price. However, stock market volatility sometimes results in stock prices that are out of all proportion to the actual economic strength of a company. Often such increases are observed in startups that have few employees, no profits but are traded on the stock exchange with several million dollars. Many shareholders then bet on these securities in the hope of quickly making high profits through rising prices.
However, after this first boom, a phase usually sets in, in which demand drops significantly again. As a result, prices stabilize at a lower level. The stock market volume of the respective company also drops to the same extent. Then a so-called “consolidation” occurred. In other words, it is also spoken of a “cooling of the course” or a course normalization.
Consolidation on the stock market can prevent stock bubbles
The past has shown that disproportionately strong stock prices can lead to a big bubble. The so-called “dot-com bubble” has led to shareholders losing a lot of money at the beginning of the 2000s when they invested in Internet companies.
A consolidation of the price can prevent such excesses on the stock exchange. In a sense, this is a kind of self-regulation of the price approaching the true value of a listed company. For investors, consolidations in this sense can be an important signal that no strong price fluctuations are to be expected in the medium term.
If a company consolidates its debt, it can also send a positive signal to investors. In this case, the balance sheet improves and the company’s stock becomes more attractive to many investors, which in turn can lead to a price increase.