Why should you consider Loan consolidation
Debt consolidation entails taking out one loan to pay off many
others. This is often done to secure a lower interest rate,
secure a fixed interest rate or for the convenience of servicing
only one loan. Debt consolidation can simply be from a number of
unsecured loans into another unsecured loan, but more often it
involves a secured loan against an asset that serves as
collateral, which is most commonly a house (in this case a
mortgage is secured against the house.) The collateralization of
the loan allows a lower interest rate than without it, because
by collateralizing, the asset owner agrees to allow the forced
sale (foreclosure) of the asset in order to pay back the loan.
The risk to the lender is reduced so the interest rate offered
is lower. Because of the theoretical advantage that debt
consolidation offers a consumer that has high interest debt
balances, companies can take advantage of that benefit of
refinancing to charge very high fees in the debt consolidation
loan. Sometimes these fees are near the state maximum for
mortgage fees. In addition, some unscrupulous companies will
knowingly wait until a client has backed themselves into a
corner and must refinance in order to consolidate and pay off
bills that they are behind on the payments. If the client does
not refinance they may lose their house, so they are willing to
pay any allowable fee to complete the debt consolidation. In
some cases the situation is that the client does not have enough
time to shop for another lender with lower fees and may not even
be fully aware of them. This practice is known as predatory
lending. Certainly many, if not most, debt consolidation
transactions do not involve predatory lending.
What is a Federal Student Consolidation Loan? A Federal
Consolidation Loan is a loan that you can use to pay off all or
a portion of your original eligible federal student loans. You
combine (consolidate) your existing federal student loan debt
into one new loan. What are the terms of a Federal Consolidation
Loan? * The interest rate on a Federal Consolidation Loan is
fixed, meaning it will not change over the life of the loan,
even if the interest rates on other federal loans go up (or
down). * The interest rate is calculated from the weighted
average of the interest rates of your existing loans, rounded up
to the nearest 0.125%, with a cap of 8.25%. * There are no fees
to apply for or receive a Federal Consolidation Loan. * The
repayment term is up to 30 years, depending on the total amount
of your student loan debt, and there is no pre-payment penalty.
Why should you consider consolidation? With a Federal
Consolidation Loan, you can benefit from: * Lower monthly
payments * Fixed interest rates * Only one payment for your
federal loans each month * New or renewed deferments Because you
are allowed up to 30 years to repay your loan, your monthly
payment can be significantly lower with a consolidation loan,
although you may pay more in total interest over the life of
your loan. When should you consolidate? Only loans that are in
grace, deferment, forbearance, or repayment can be consolidated
into a Federal Consolidation Loan. Loans that have an in-school
status cannot be consolidated. There are no deadlines. However,
Federal Stafford Loans that are in the grace period (or in
deferment) have the lower rate compared to loans in repayment
(or forbearance). Because the current interest rate is used in
the calculation to determine the weighted, fixed interest rate
of your consolidation loan, you will save money over the long
run if you consolidate while in your grace period or while in
deferment. (If you choose to consolidate while in your grace
period, keep in mind that your grace period will be cancelled
when the consolidation loan is issued and you will begin
repayment.)
Student loan consolidation In the United States, federal student
loans are consolidated somewhat differently, as federal student
loans are guaranteed by the U.S. government. In a federal
student loan consolidation, existing loans are purchased and
closed by a loan consolidation company or by the Department of
Education (depending on what type of federal student loan the
borrower holds). Interest rates for the consolidation are based
on that year's student loan rate, which is in turn based on the
91-day Treasury bill rate at the last auction in May of each
calendar year. Student loan rates can fluctuate from the current
low of 4.70% to a maximum of 8.25% for federal Stafford loans,
9% for PLUS loans. The current consolidation program allows
students to consolidate once with a private lender, and
reconsolidate again only with the Department of Education. Once
the student has consolidated their loans, the loans are set to a
fixed rate based on the year they consolidated; reconsolidating
does not change that rate. Federal student loan consolidation is
often referred to as refinancing, which is incorrect because the
loan rates are not changed, merely locked in. Unlike private
secton debt consolidation, student loan consolidation does not
incur any fees for the borrower; private companies make money on
student loan consolidation by reaping subsidies from the federal
government. Student loan consolidation can be beneficial to
students' credit rating, but it's important to note that not all
federal student loan consolidation companies report their loans
to all credit bureaus; SLM Corporation (formerly Sallie Mae)
does not report to Experian or Transunion, which means that
students will have differing credit scores at Equifax,
Transunion, and Experian.
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