What is a loan smoothing? How to set it up?

Consolidating repayments using loan smoothing is a clever solution to avoid the risk of debt distress. The use of this technique has become widespread with the rise in property prices and the low level of interest rates.

Realization of a real estate project may require the use of several loans (PTZ, Employer Loan, PEL …). Loan smoothing avoids paying too late a maturity at start-up and maintaining a constant maturity throughout the repayment period. What is a smoothed loan? How does the smoothing of credits work? All the explanations.

Definition and operation of loan smoothing

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Loan straightening is a technique used to keep the monthly payment of credit constant throughout its duration while several loans are being refunded. The monthly payments of each loan are taken into account in order to balance them over time. Uncommon 20 years ago, this technique is nowadays commonly used.

It can be used to reduce its monthly payments. 

It can be used to reduce its monthly payments. 

More concretely, the smoothing of loans meets three objectives. Indeed, the smoothed loan reduces the weight of bank credit during the first years. If this solution mechanically increases the duration and the total cost of the loan, it makes it possible to get out of the budget. It should be verified that the gain in the monthly payment obtained is more interesting than the increase in the total cost of credit.

Then, smoothing loans can reduce its monthly payments while maintaining the same repayment term. In this case, the decrease in monthly payments will logically be less important but the cost of the loan will eventually be lower.

Finally, credit smoothing can help reduce the overall duration of the loan if your income is sufficient. The loans contracted will then be repaid via a single term to reduce the duration of the loan and the total cost of the loan.

Therefore, by smoothing loans, you can either borrow a larger amount, or keep a more comfortable life despite repayments of credits.

How to get a loan smoothing

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To set up a credit smoothing, you must first establish the balance sheet of your debts by calculating the total monthly repayments to be paid each month. The second step is to determine the amount to smooth which involves determining your ability to repay and calculate the monthly installment of the mortgage. The amount to be smoothed is equal to the repayment capacity deducted from the total monthly payments and monthly payments of the mortgage loan. The feasibility of smoothing must then be established. In some cases, it is possible to perform two smoothings, one of which will be used to reduce the monthly installment of the mortgage and the other to do the same with the loan ending in second.

To obtain a loan smoothing, you can contact the same bank that holds the credits purchased. You can turn to a bank but it will usually offer you a buy back credit.

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