Debt consolidation
You turn several instalments into one lower one. Sounds like nothing but advantages - and that is how it sounds in the adverts. Except that the lower instalment comes mainly from extending the repayment period, so the total cost usually rises. We show both numbers at once, because only together do they tell the truth.
| Loan | Capital | Rate | Remaining | Instalment | Interest cost |
|---|
Where the lower instalment really comes from
Consolidation adverts sell one number: the instalment. It was PLN 1,400, now it is PLN 630. Hard to argue - it is true. The problem is that the truth is only half the answer.
The instalment is not the cost. The instalment is the pace at which you repay the debt. You can slow it down to any level you like, as long as you agree to pay for longer - and interest is charged on the balance for every month that the debt exists.
The same amount, the same interest rate, a different term
Take PLN 38,000 at 9% and change only the repayment period. The interest rate stays put, the bank does you no favours:
| Term | Instalment | Total you pay | Interest alone |
|---|
The instalment falls by more than half. Interest rises almost threefold. It is the same transaction described by two numbers - and which one you are shown decides whether you see it as a bargain.
This one sentence is worth this whole page. Consolidation lowers the instalment mainly by extending the term, not through a lower interest rate. If someone talks to you about savings but only shows you the instalment - they are showing you half the agreement.
When consolidation REALLY makes sense
- You are swapping expensive debts for a cheap loan. A credit card at 18-20%, a payday loan, an overdraft - here the interest rate is so high that switching to 9% saves real money, even after extending the term. It is the only scenario in which consolidation can be cheaper and more convenient.
- You are rescuing your cash flow. If your instalments eat up 60% of your income and you are genuinely at risk of missing payments, a lower instalment is worth a higher cost. Debt collection, penalty interest and a negative record in BIK (Poland's credit bureau) cost far more than a few thousand in extra interest. You are paying for security - consciously and knowing how much.
- You are simplifying your life. One instalment, one date, one bank. Fewer chances to forget something. A real value, though hard to put a price on.
- You take a long term but plan to overpay. This is the smartest use: a long term gives you a safely low mandatory instalment, and the overpayments shorten the loan anyway. Check it in the overpayment calculator.
When consolidation does NOT make sense
- When you are only extending a cheap loan. Putting a loan at 6-7% (or, worse, a mortgage) into a consolidation just to spread it over more years is pure loss. There are no savings on the interest rate here - only interest charged for longer.
- When the fee eats the gain. An 8% fee on PLN 40,000 is PLN 3,200 - added to the capital, so you also pay interest on it for the whole term. Sometimes the fee alone costs more than all the interest you save. Check it with the slider above: raise the fee and watch the tile on the right.
- When you top up with cash "while you're at it". See below.
- When the problem isn't the structure of your debt but your budget. Consolidation doesn't cure the cause. If you spend more than you earn every month, after consolidation you will have a lower instalment, more free credit limit - and in a year's time new debts next to the consolidated one.
You come in to clear PLN 38,000 of debt and walk out with a loan of PLN 55,000, because the adviser asked: "How about taking an extra 15 thousand while you're at it? The instalment will still be lower than today."
And technically that is true - the instalment will still come out lower, because the term is longer. Except that you have just turned debt reduction into new debt. The debt grew by 40%, the interest grew with it, and the feeling of success remained, because you are looking at the instalment.
The adviser is not a bad person. It is just that their commission grows with the loan amount, and your instalment - doesn't. The purpose of consolidation is exactly the opposite: to reduce debt, not to increase it.
Three questions before you sign
- How much will I pay in total - today and after consolidation? Not the instalment. The total. If the adviser can't tell you, work it out here.
- What is the APR (RRSO) of the new loan? Because it includes the fee, insurance and all charges. It is the only number you should compare between offers - check it in the APR calculator.
- How much does early repayment cost? With a consumer loan the bank must refund costs proportionally when you overpay (CJEU ruling C-383/18, the so-called "small TSUE" ruling). If you plan to overpay, make sure there are no extra fees for early repayment.
1. The instalment is the pace of repayment, not the cost. You can always lower it -
you just have to pay for longer.
2. Consolidation pays off financially mainly when
it kills debts at 18-20%, not when it stretches out ones at 7%.
3. If you take extra cash when consolidating, it isn't
consolidation. It is a new loan with a nicer name.
Before you consolidate - check whether overpaying is cheaper
If you can afford your current instalments, overpaying expensive debt gives you a guaranteed return equal to its interest rate. Consolidation won't beat that.