Why Student Loan Consolidation Rates Are So Significant
Alleviating student debt is all about cutting repayment sums, and this is easily accomplished through consolidation loans. But real savings can be made if student loan consolidation rates are kept to a minimum.
It does not take a mathematical genius to work out that the smaller the interest rate charged the lower the required monthly repayments. And by extension, the smaller the repayments, the more affordable the loan can be. Clearing college debts is a huge undertaking, so a consolidation program is the most practical option, but that is not to say that the first program available be picked.
Different lenders will offer loan consolidation programs with different terms and conditions, and ultimately with different rates of interest. Finding the lowest one can translate to making larger savings.
How Consolidation Works
Of course, understanding how a consolidation program works is the first step to securing the best possible deal. Simply put, consolidation means taking all of the existing loan balances together and repaying them in full, replacing them with one single debt at one single interest rate. When it comes to student loans, consolidation rates can vary quite a lot.
This is where careful consideration needs to be made. For example, if there are 5 existing student loan balances ($1,500, $2,500, $3,000, $3,500, and $4,500) at 5 different interest rates (4%, 4.25%, 4.5%, 5% and 5.5%) the whole monthly repayments can be quite high. But buying out the total balance ($15,000) at just one rate of interest (4%) can lead to considerable savings.
Clearing college debts in this way is much more constructive, and if the repayment term is lengthened to 10 years instead of 5, for example, then the repayments on the loan consolidation are kept even more affordable.
Fixed Rate or Variable Rate
When it comes to interest rates, there are two types to choose from: fixed interest rates and variable interest rates. There are pros and cons to both types, but the type chosen can have a real influence on the affordability of the loan debt. With student loan consolidation rates, remember, affordability is the key factor.
Fixed rates are interest rates that remain the same throughout the lifetime of the loan. This makes the repayments easy to budget for, with events in the markets having no effect on the interest being paid. Many students like clearing college debts through this method for this reason, but the interest rate charged is slightly higher.
Variable rates can fluctuate with the markets, which is something of a double-edged sword. The starting rate is always quite low, but the monthly repayment due can increase sharply if interest rates increase, so it is harder to budget for. However, should rates drop, then the loan consolidation repayments become less.
The Best of Both Worlds
Depending on the lender, it may be possible to mix and match both interest rate types. It is something that is often done with mortgages, and some will extend the same scope to students when agreeing student loan consolidation rates.
The logic is that, with 25% of the loan, interest is at a fixed rate allowing for a constructive repayment scheme. But the remaining 75% may be at a variable rate. This means that the loan consolidation repayments are kept low initially, with the benefits of falling interest rates there to be enjoyed if the occasion arises.
And should the rates increase, then it only affects a share of the loan, not it all. This is a more complicated way of clearing college debts, but can work out less expensive.
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ABOUT THE AUTHOR
Devora Witts is a certified loan consultant who helps people get approved for Loans for People with Bad Credit and Bad Credit Mortgage Loans. To get aid with your financial situation you can visit her at http://www.badcreditloanservices.com