Important Facts You Need To Know About Payday Loan Debt Assistance
[caption id="attachment_38" align="alignleft" width="300"] Payday Loan Forgiveness[/caption]
Are you tired of harassing calls from pestering collection agencies?
Do you want to end the vicious payday loan cycle and save some money?
Well, if you answered yes to both questions, then it’s time to seek payday loan debt assistance.
Payday loans can put you in a tricky financial situation. It’s even worse if you have so many of them. You’ll be overburdened and trapped in a cycle of debt due to their horrible repayment plan and outrageous interest rates.
A debt assistance plan will not only help you clear your debts faster, but it’ll also save you from losing money and being overcharged. How does payday loan debt assistance work?
If despite your best efforts are still struggling to pay off high interest payday loans, a debt consolidation company comes in and negotiates with your lenders to lower your interest rates and waive off the additional charges and penalties the loans have accrued.
They will then offer you a payment plan that’s both flexible and affordable depending on your current financial situation. Before coming up with a manageable payment plan, the debt relief company will offer you some credit counseling where they’ll professionally analyze your spending habits and credit utilization to help you get control of your finances. When to seek payday loan debt assistance
When you get trapped in a cycle of debts due to so many payday loans.
When you cannot keep up with monthly payments, and the penalties and fees keep piling.
When you want to reduce the double digits interest rates and APRs.
To keep off the hungry payday lenders from your paycheck.
Forms of payday loan debt assistance
You can clear your crippling payday loans in two ways – a payday loan debt settlement, or payday loan debt consolidation.
Both methods have their pros and cons, so it’s important to choose wisely what works best for you. Payday loan debt consolidation
When you have several outstanding debt obligations, you can easily plunge yourself in a debt trap that’s difficult to escape.
Students’ loans, credit card debts and cash advances can get out of hand and cause you indescribable financial distress.
To escape such a trap and secure yourself a stable financial future, you can combine all these debts into a single monthly payment that you’ll pay off for a term of 1-30 years.
So instead of the numerous repayments you make to different lenders with varying interest rates, you’ll make one payment at reduced rates.
Consolidating your payday loans lowers your interest rates, gives you a flexible and easy repayment schedule, and gradually improves your credit score. Benefits of payday loan debt consolidation
By consolidating your payday loans, you’ll achieve the following:
Reduce your chances of being sued and stop the several calls from collection agencies.
Shield your paycheck from automatic debits.
Get an affordable and manageable repayment plan.
Lower the double digits interest and fees charged for late payment.
You don’t have to pay an advance fee when applying for these loans.
You lose control of your credit and finances and have to act as per the consolidator’s advice.
You may end up paying more in interest because this loan term is usually very long.
You may lose your property in case you used it as collateral to secure the loan.
The qualifications for payday loans debt consolidation vary from lender to lender, but some of the basic requirements are:
You must have a source of income from which you’ll be able to repay the loan.
You should have at least two outstanding payday loans.
Your total debt should amount to at least $1,000.
A valid identification card as proof of residence.
Active bank account/checking account.
Debt settlement occurs when you contract a third party company to negotiate with creditors or collection agencies on your behalf to reduce your debt. If the debt settlement company is successful, you’ll pay a lump sum of the agreed amount and the rest would be cancelled.
Although it’s a means of relieving you of your debt burden, it’s not a viable option for everyone, and there is usually no guarantee that your creditors will agree to it, or that the debt settlement company will successfully reduce all your debts. How it works
If you have chosen debt settlement as a means of clearing your debts, this is the step to follow:
Contact a debt settlement company of your choice and narrate to them your predicament.
They’ll then ask for the names of your creditors and the full amount you owe them.
Once that has been established, the debt relief company will explain to you the options you have and come up with a comfortable monthly payment plan depending on your financial status.
They’ll then advice you to withhold all payments to your creditors, and instead save in an escrow account that they monitor.
Once a substantial amount has been attained, the debt settlement company will reach out to your creditors and negotiate an amount that’ll reduce your debt considerably.
If the creditors agree to this, they’ll go ahead and pay off the agreed amount in full and charge you a percentage of the cancelled debt.
It all looks so simple, but what is bad about debt settlement?
On the surface, debt settlement seems like the best option, but it has risks that outweigh its benefits. Below are some of the disadvantages:
Your credit score suffers
By stopping payments to your creditors, the missed payments will appear on your credit report as delinquent accounts.
Usually, the credit settlement company tells you to stop paying your creditors before they even reach out to negotiate.
During this time, the creditors still report your nonpayment until that time when debt Relief Company will strike a deal with them.
This information will negatively affect your credit scores, and is likely to stay on your reports for 7 years.
This will reduce your chances of securing loan or even get employment.There is no guarantee that the creditors will agree to this offer
Most creditors want the accounts settled in full and will not agree to any negotiations.
There’s also no guarantee that the debt settlement company will be successful in adjusting all our debts. You’ll incur more expenses
Once you stop paying your debts, creditors have no choice but to forward our account to collection agencies.
Apart from being hounded with calls, you’ll receive threats of a jail term consistently.
In worse scenarios, the creditors can slap you with late payment fees and piled interests. They may even sue you, and demand payment.
The federal law also treats cancelled debts as income, and this means you’ll have to pay tax on your settled debts. You’ll still pay even for unsettled debts
If you had debts amounting to $10,000, and the agreement between you and the debt settlement company was that they’d charge a percentage of the total settled debt.
If the company successfully settles $5,000, it’s their right to charge you 50% of the total amount you agreed on.
Losing money while still on debt is never a desirable thing for anyone in debts.Some of the benefits of debt settlement are:
You’ll be debt free in no time.
It’s an easier option instead of bankruptcy.
It’ll reduce and help you clear your overwhelming debts.
A step-by-step process of payday loan debt assistance
To get started in consolidating and settling your debts, follow the steps below:
Once you have evaluated and decided on the debt consolidation company to work with, you’ll fill out the application form on their website or call the company directly.
Explain your debt obligations to the credit experts who’ll counsel you and explain your options.
They will then give you a quotation for their services and tell you how long it’s likely to take to clear off your debts.
Once you agree to their terms, you’ll sign up into the debt consolidation program from the comfort of your home.
The debt consolidation company will then contact your creditors and negotiate for better repayment terms and a debt settlement plan. You don’t have to deal with lenders. The company does that on your behalf.
Depending on the debt relief plan you choose, you can either save money into an escrow account or take out a loan to clear off your debts.
Once there’s enough money to make a lump sum payment to your creditors, the debt relief company will make out payments to your creditors to settle your debts. If you choose a consolidation plan, you’ll use the loan you took to pay your debts then make a monthly payment to one creditor.
Be consistent until you clear off all your debts and are debt free.
While everyone desires to live a debt-free life, sometimes debts are inevitable.
Life events may force us to take out loans when we least expect.
Such dire situations leave us vulnerable to payday loans and cash advances that come with high interest rates, APRs, and horrible repayment terms.
To avoid falling into a debt trap, ensure that you lower your credit utilization rate.
Take out loans that you can comfortably pay, and if things get out of hand like they sometimes do, opt for payday loan debt assistance before your debt burden causes you more financial distress.
Use the above information if you need insight on how to go through the process.
Many people are struggling when it comes to managing their finances. There comes a time when you are in need of cash and you don’t have that much option, most would go for payday loans. There is nothing wrong with taking out a payday loan, especially when you really need it. However, there are instances where people find it difficult to manage their loans to the point that they experience debt problems. How do you get out of a payday loan cycle? How do you achieve financial freedom?
The moment you start thinking that just because it is easy to get a payday loan is the moment where you start experiencing problems. Just because it is convenient and fast does not mean that it is the right and the best thing to do. If you fail to pay the interest rate and a loan, you will incur late charges and this will make the loan a lot more expensive. This explains why there are so many people who fall into the debt trap.
Consolidate Your Debt: Is There A Good Way?
Think Long Term
For you to get out of that cycle, it is very essential that you think long term. You don’t just focus on the things you want. You try to find the root cause of the problem and the root cause is attributed to mismanaged finances that leads you to the possibility of getting a payday loan again. By knowing how to manage your finances and by having that financial discipline to do so, it is much easier for you to achieve your financial goals.
Once you are already at that point which you know how to spend your money wisely, you can start rebuilding your credit score. One of the main reasons why many people struggle and have loan options is because they have bad credit. Chances are if you have poor credit scores, you won’t be able to have as many options as other people. With poor credit standing, you are forced to go for lenders who often charge high interest rates or what you call expensive loans.
The good news is that there are definitely several ways for you to get out of the payday loan cycle. It is never easy. It takes time and a huge amount of effort on your part.
Here are some effective strategies to eliminate your outstanding loans:
Stop getting more payday loans
For many people, getting a payday loan is the quickest and the most convenient way to get instant cash. After all, they are not like other kinds of loans. In fact, you can even submit your application online. At first glance, this may appear to be the best decision, especially when you are in need of cash and you don’t know where to get the amount that you need.
What many people are not aware of is that payday loans are quite expensive. Of course payday loan lenders will always try to market their loan packages saying that they don’t charge that high or the loan package is very affordable. But if you’re going to compare it with other kinds of loans, you can easily see the differences.
Now imagine yourself in a situation where you have one payday loan and you are struggling how to pay back this loan. The last thing that you want to happen is for you to get another payday loan simply because you are run out of cash. The next thing you know you will end up worrying about the new loan as to how you can pay it back again. To get rid of the cycle, you need to stop getting a new loan, especially a new payday loan.
Look at the big picture
When you are experiencing problems in paying your payday loan, you have this tendency to be too focused on the specific amount you need to raise. Although there is nothing wrong in doing that just so you are aware of how much money you have to pay, it is much better that you focus on the whole picture.
By taking a look at the debts that you have altogether, it is way much easier for you to find opportunities and to plan to repay your loan. How do you do it? One of the ways is for you to list down all your outstanding loans. Take the time to record the details of the current outstanding loans, including the interest rates as well as the amount that you still need to pay. Some people may think that this may not be a good idea, especially when you are dealing with a big amount of money. Then again, if you know what you have to work on, you can at least identify ways on how to solve the problem.
Set your priorities
As with any problem that you are dealing with, you have to set your priorities. When you know what type of loan you have to pay and how much each of these debts actually cost you, then you know what to prioritize. Financial experts will tell you that one of the things that you need to do is to prioritize those debts that are charging you high interest. The reason is that these loans are expensive which makes it more difficult to you to handle your finances and repay the other loans.
How do you get rid of a payday loan? You can actually restructure your debt or if you can find ways to raise the whole amount as soon as possible.
Ask for extended payment plan
Compared with other kinds of loans, payday loans are costly and it is structured in a way that it is hard to repay. To wipe out your loan, you can actually find ways if it is possible for you to restructure your debt. One of the most common mistakes of borrowers is that when they are face difficulties paying the loan, they don’t want to talk to their lenders.
There is always that possibility that when you talk to your lender, you can get an extended payment plan. By asking if you can have the extended payment plan, your loan is divided into smaller payments. This allows you to pay back the loan. But the good thing is that you never have to worry about additional fees or other interest that you need to pay. There is actually no harm in trying to get in touch with your lender. At least, you know you have tried all the possible options.
What can you expect in getting an extended payment plan? Once your lender allows you to extend your payments, you will have to sign a new agreement. Under the new contract, the terms and conditions of the extended payment plan are provided.
Consider Refinancing with a Personal Loan
Another alternative for you to get rid of your payday loan is to refinance it using a personal loan. However, it is very important that you qualify for the personal loan before you can even choose this option. There are online lending companies that allow you to apply for a personal loan even if your credit score is below 600. Another option is that if you have your own credit card, you can actually get a cash advance and repay your loan. Then again, you need to keep in mind that this will only apply if you only have one payday loan or a few. In such cases where in there are several outstanding loans that you need to get rid of, the last thing you want to do is to get another loan that will make it even more difficult for you to pay back the loans.
Are you considering getting a personal loan? A personal loan is just one of the different types of loans available. However, this is more used for consolidating your debt or when you are in need of immediate cash.
Here are some FAQ about personal loans:
Personal loans are considered to be unsecured loans. This only means that you do not have to worry about your assets being used as collateral. If you default on your loan, they cannot get any of your property. That is why this kind of loan makes it a more challenging and difficult to get. Since the lender cannot possess any asset in the event that you no longer able to pay your loan, it makes this kind of loan high risk on their part. That is why in applying for a personal loan, they usually look at your credit score and other factors to make sure that you are capable of paying back.
The amount that you can get is fixed
Personal loans give you a fixed amount. It is not as big as other types of loans which range from about $1,000 to $50,000. The amount that you can get actually varies depending on the lending company, your credit rating, and your income. You can expect that if you have good credit score is that you can have more money that you can borrow when you apply for a personal loan.
The interest rates are fixed
In the entire life of your loan, the interest rate is not changed. The lender takes into consideration your credit score. The higher your credit score, you can expect a much lower interest rate. This allows you to borrow a more affordable loan compared to when you have poor credit scores.
The repayment period is also fixed. You can either pay it in a year or two years depending on the terms and conditions of the contract. If you are for a longer repayment scheme, you can expect that the amount that you pay every month is much lower. However, when you look at the cost of the interest rate, it is actually expensive. This makes it a whole lot more difficult for you since you are tied with the loan and if you have other outstanding loans, this might not be the best option for you.
Try credit counseling
There are many nonprofit organizations that offer credit counseling programs. These programs are created to help borrowers were struggling to pay their payday loans and other debts. At first you may say that it’s not necessarily needed. Some people also have the tendency to attempt to do things on their own because they fear that other people would judge them or other people cannot really help them. Credit counseling will help you assess your financial situation.
These people have been working as financial counselors, they know exactly how to look at your situation and give you helpful advice. First of all, they can help you when it comes to setting up a concrete plan in order for you to get out of the loan cycle. On top of that, they may also know other lenders that offer cheap loans that you can use to refinance your other debts.
What can you expect from a credit counselor?
They can help you in so many ways. For one, they can give you advice on how you can manage your business. Second is that they can help you create a budget and even get a copy of your credit scores. By having access to free workshops and other materials, it is much easier for you to assess the situation and to organize plan in order for you to eliminate your loans in the long term.
You can look at the official website of the financial counseling Association of America or National Foundation For Credit Counseling. Take the time to make a list of different credit counseling organizations. You may want to also gather some information and call them directly.
Find Ways to Increase Your Income
One of the main reasons why people take out personal or payday loans is because their current cash cannot meet their needs. It’s more difficult especially if you don’t know how to manage your finances. But if you’re looking for a long-term solution to get rid of your debts, you can actually find ways for you to increase your income.
Find a part-time job
Although you don’t necessarily have to overwork yourself just to get enough cash, it doesn’t hurt if you have a part-time job. By having a part-time job, you can actually have side income that allows you to have spare cash that you can use for your daily needs. There are different part-time jobs that are available. When you have free time, instead of wasting your time doing nothing, you might as well put in a few more hours to get some income.
Do a garage sale
Do you want to throw away old stuff and other things that you are no longer using? Instead of throwing them away, why not make money out of it? You can actually sell them really cheap price and there will be many people who may be interested to purchase these items. If you have so many items that you can sell, you can actually raise a good amount of money. Although the amount cannot entirely cover the actual cost of the loan, it will at least reduce your financial burden.
Nowadays, there are many professionals who use Uber. As an Uber driver, you can choose your time and number of hours. This kind of part-time job is very easy since you just need to drive your car and pick up and drop off your customer. The amount of money can be quiet good, especially if you are working in peak hours.
Manage Your Finances
Last but not least is that it is very important that you know how to manage your finances. Having many payday loans speaks a lot as to how you handle your finances. It is very essential that you come up with a budget.
Rule of thumb is that never purchase something that you know you cannot afford. This will put you in the more difficult financial situation.
You need to discipline yourself financially and spend your money wisely. In the long run, it makes it a whole lot easier for you to avoid situations where and you have to get a loan.
Student loan consolidation may not be the silver bullet solution that it used to be and can be quite daunting. However, consolidation can still offer some benefits depending on your situation.
First of all, student loan consolidation can simplify your finances. By consolidating your student loans, you roll all of them into one bigger loan. This means you’ll have just one loan to keep track of and pay off instead of several ones. This helps to reduce late or missed payments. There’s also the possibility of securing a lower or fixed rate for your student loan consolidation debt.
About a decade ago, consolidating your student loan was perhaps one of the smartest financial decisions you could ever make. However, many things have changed since then.
To find out if consolidating your student loan is the right choice for you, take a look at some of the current student consolidation pros and cons, and whether it will actually save you money.
Key points on student loan consolidation
Here are some things you might want to keep in mind.
1. One of the best reasons to consolidate student loans is that it lets you stay organized. You now make one payment on one big loan instead of a couple of separate payments on several smaller loans. This will help prevent missed or late payments which makes consolidating your student loans worth it.
2. Consolidating federal student loans issued after 2006 with a federal student consolidation loan won’t save you any money because your loans already have fixed rates. You might be able to lower your monthly payments by choosing a longer repayment term, but this will cost you more in interest in the long run.
3. Consolidating your student loans with a private student loan consolidation company can potentially save you more depending on current interest rates. With private student loan consolidation, you’ll need good credit to qualify for a good interest rate. A variable rate loan will have a lower interest rate in the beginning, but interest rate could rise over time. A fixed rate consolidation loan may be higher to start with but you won’t have to worry about the interest rate increasing and having to pay more later on.
4. In general, steer clear of consolidating federal student loans with a private lending company unless you get an unbeatable rate. Federal student loans have many valuable fringe benefits that private loans don’t offer.
Rising cost of college and student debts
College education has never been more expensive. According to The College Board, the price for one year at a standard private college has jumped 146% in the last three decades to $31,231, while the four-year public school cost has increases insanely by 225% to $9,139. Those figures have been adjusted for inflation, otherwise they would be obscenely high. The figures only include schooling fees and not living expenses.
It comes as no surprise that student loan debt is on the rise too. In 2013, 59% of graduates from four-year public colleges had borrowed money to help them get through school, up from 52% in 2001. Their average debt load had increased 24% within a decade to $25,600, according to The College Board. If you add private school grads into the mix, the average American owes $29,000 in student loans.
We must not forget that these numbers are averages. Some students managed to earn their degrees with far less debt. On the other hand, some accumulate a lot more. No matter where you are on the spectrum, being informed can help you stay organized. It can help you figure out the best way to pay back your debt and maintain a reasonable lifestyle while doing it.
With student loan consolidation, you’ll have to be realistic about its benefits and downsides.
How to consolidate student loans
Consolidating your student loans can be a breath of fresh air. It allows you to consolidate (combine) multiple federal education loans into one. The result is a single monthly payment instead of multiple payments.
There are two main ways to do this: a private or a federal student consolidation loan
Federal student loan consolidation
You can consolidate almost any federal student loan using the direct consolidation loan program. However, you can’t include any loans from private lending companies or any PLUS loans borrowed by your parents on your behalf.
You may start consolidating your federal loans any time you wish after your graduation, leaving school or dropping below half-time enrollment. You probably don’t have to undergo a credit check to start consolidating your student loan. The interest rate on a federal student consolidation loan is fixed throughout the life of your loan.
However, it varies from one person to another. Reason being the interest rate is based on the interest rates of the loans you’re consolidating. You’ll have to pay the weighted average of those rates rounded up to the nearest 1/8th of a percentage point.
Private student loan consolidation
Various private lenders also offer private student loan consolidation. Some even allow you to include federal student loans in a private consolidation loan. If you don’t have a long or strong credit history, as is the case with many students and recent graduates, you may not qualify for private student loan consolidation. You might be required to get a co-signer with better credit to secure a lower interest rate. The interest rate on your private consolidation loan can be variable or fixed. We’ll discuss more on this later in the post.
Pros and cons of student loan consolidation
Student loan consolidation PROS
1. Depending on how many different loans you’re juggling with, keeping track of just one bill and payment due date instead of several can be a big relief, especially if you’re a recent student who is not quite used to the monthly grind of paying bills and managing finances.
2. You may get to choose a repayment plan that’s the best fit for your financial situation. For example, federal student consolidation loans offer several payment plans that take your income into account.
3. Consolidating may leave you with a total monthly payment that’s lower than what you were paying for your loans separately. In some cases, it can also save you money in the long run though that’s an unlikely scenario with federal consolidation.
Student loan consolidation CONS
1. The major downside ofstudent loan consolidation is that you may end up paying more money over the life of your loan if you decide on a longer repayment schedule to make your monthly payments more manageable.
2. As you may gain repayment plan options with consolidation loans, you may lose access to other repayment plans benefits such as interest rate discounts or loan forgiveness, forbearance and deferment options. This can be a concern especially if you’re consolidating a federal student loan with a private lending company as federal loans are typically set up with far better borrower protection than private loans.
3. Consolidating your student loans may often mean that you’re locking in your interest rate. This can either work for or against you, depending on the current interest rate and whether your loans already have fixed rates or not. However, given that you can consolidate only once, it is a factor that’s worth careful consideration.
Does student loan consolidation help save money?
Truth be told, this benefit of student loan consolidation really depends on your new interest rate and any fees that the lending company charges. When lending companies claim that they can help you save money with student loan consolidation, they usually mean they can lower your monthly payments by stretching out your term, for instance from 10 years to 20 years. That actually means you’ll pay more money in the long run.
To better answer this question, we’ll look separately at whether consolidating federal student loans and private student loans can save you money.
Will federal consolidation save you money?
Let’s say the year is 2005 and you are about to consolidate around $17,500 in student loans. In 2005 federal student loan rates were still variable and back then interest rates were at a historic low. So in this situation, consolidating is a no-brainer. You’d be able to consolidate all your student loans during your grace period at around 2.875% interest rate, which would have been locked throughout the lifespan of the loan.
Since 2006, however, all federal student loans have been issued with fixed interest rates throughout the life of the loan. Which means federal student loan consolidation now will not save you the money that you would have saved in 2005. Today, unless you’re including older loans that still have high or variable rates, consolidating federal student loans will simply combine loans that already have fixed interest rates.
You could see some minor savings, or you could end up paying a little bit more. This is because of the way your new interest rate will be averaged and rounded off. It’s a negligible amount either way.
For instance, you’ve three federal student loans:
1. Loan A is a $10,000 loan that you took out in 2013 at a fixed 4.5% interest rate.
2. Loan B is a $10,000 loan that you took out in 2014 at a fixed 3.4% interest rate.
3. Loan C is a $5,000 loan that you took out in 2015 at a fixed 6.8% interest rate.
If you consolidate these loans, that will leave you with one loan for $25,000 at an interest rate based on the weighted average of the three loans interest rates rounded up to the nearest 1/8th of a percentage point. The weighted average means the high rate on the smaller $5,000 loan counts less compared to the others.
In that case, the new interest rate on the consolidation loan would be 4.625%.
Total paid amount
Here’s what your total paid amount would look like if you paid off each loan separately using a standard 10-year repayment plan:
Loan A ($10,000 at 4.5%)
Loan B ($10,000 at 3.4%)
Loan C ($5,000 at 6.8%)
When we add the amount paid for each separate loan with a ten-year repayment plan at a combined monthly payment of about $260, the total becomes more than $31,150.
Now let’s compare the $25,000 consolidation loan with a 4.625% interest rate. By consolidating, you’ll actually pay $31,272 over the full life of the loan with a monthly payment of $260.61. As you can see, consolidating actually costs you about $120 more in this case – about a dollar more every month for 10 years.
A note on longer repayment terms
The example above compares paying down a consolidation loan and paying your loans separately, keeping the repayment term the same. If you consolidate and afterwards lengthen your loan term, it will lower your monthly payment. However, it’s likely that you’ll pay more in the long run.
If you are to pay off that $25,000 consolidation loan over 20 years instead of 10, your monthly payments would drop to about $160, which will free up an extra $100 a month. If you’re falling behind on other bills or need to tackle high-interest credit card debts, this can be quite helpful. Once you’re in a better financial position, you can always start paying more than the minimum due on your loan.
However, if it takes you 20 years to pay back, you’ll pay $38,366 over the life of the loan – a full $7,000 more than you would have paid on a 10-year repayment schedule.
Will private student loan consolidation let you save money?
Some banks and other non-government lending companies will consolidate your student loans. Some of which will allow you to mix some federal student loans as well. (However, you should remember that the reverse is not possible – you cannot consolidate any private student loans using a federal consolidation loan.)
If you’re thinking of consolidating both types of loans through a private lender, you should weigh the pros and cons really carefully. Usually, federal student loans offer better interest rates and other perks, such as more repayment plans and hardship options like forbearance and deferment compared to private loans. this is especially true for students with poor or little credit history. Consolidating a federal loan into a private one will mean that you may lose some or even all of those benefits.
When applying for a private consolidation loan, your credit is the key to determining the kind of interest rate you’ll receive, and whether consolidation will save you money or not.
For students with poor credit or a very short credit history, it can be really tough to qualify for a good rate without a co-signer who has a good credit. A co-signer guarantees that he or she will pay the loan for you if you can’t pay it back yourself. That puts a co-signer in a very tricky proposition as it can ruin relationships if you were to make someone else carry the burden of your debt. Therefore, always pay up and don’t put someone else in a spot.
Which is better: fixed or variable interest rate?
As mentioned before, you won’t have to consider this if you’re using the federal student loan consolidation program because your interest rate will be fixed. However, if you’re looking to consolidate loans with a private lender, the choices available could be wider as many private lenders also offer variable interest rates that could fluctuate. Let’s look at some pros and cons of each to consider.
Fixed rate consolidation loans:
1. These have a higher interest rate than variable-rate options, at least initially. The lending company knows it will be unable to capitalize on interest-rate hikes down the road, so this is the price you pay for security.
2. They’re ideal for budgeting because you know your payment will be the same from month to month and year to year. It is just easy to plan ahead.
3. This might be the best option if you value the security that comes with knowing that your rate (and your payments) won’t change.
Variable rate consolidation loans
1. Variable rates have a lower interest rate, but that rate can change. Your rate will be pegged to an interest-rate index ( or a set number of percentage points above such an index). As the index fluctuates over time, so will your interest rate and therefore your monthly payment. This can work in your favor when interest rates go down, but it can become pretty costly when rates climb.
2. They are not as ideal for budgeting because your payment can change along with your interest rate.
3. These might be the best choice if you’re willing to risk the long-term security of a fixed rate for short-term savings, or if you can pay off your loan in a reasonably short time to capitalize on the low initial rate.
You’ll want to see what index your variable loan rate will be tied to. It’s often the federal prime rate or the one-month London Interbank Offered Rate (LIBOR). The prime rate has held steady at 3.25% since 2009, a low unmatched since the 1950s. The LIBOR, at 0.18% today, is starting to gradually rise in 2015 after hitting a historic low last year.
Most experts agree that interest rates have nowhere to go but up. However, the question is how much and how fast they may rise.
Two examples of private student loan consolidation
Consolidating your student loans can look pretty different depending on whether you choose a variable rate or fixed rate consolidation loan. We’ll explore these two scenarios with the same set of loans.
Example 1: Fixed rate private consolidation loan
Let’s first look at consolidating your loans with a private lending company that offers you a fixed rate consolidation loan. In this example, let’s assume you’ve three private student loans: Loan D, a $5,000 loan at a 5% interest rate; Loan E, a $10,000 loan at 8%; and Loan F, a $15,000 loan at 12%. Assuming a 10-year repayment plan, here is what the monthly payments and total amount repaid on those loans would look like:
Loan D ($5,000 at 5%)
Loan E ($10,000 at 8%)
Loan F ($15,000 at 12%)
As you can see, paying each of these loans separately will result in close to $390 in monthly payments and a total amount paid of over $46,700.
Let’s say you decide to consolidate your loans. You have pretty good credit and qualify for a fixed interest rate of 7.5% on your new $30,000 loan. Say you can stick to the 10-year repayment term and consolidating at this interest rate will mean a monthly payment of about $356 and a total repaid of about $42,730. That way you’ll save about $34 a month and $4,000 over the life of the loan.
Example 2: Variable rate private consolidation loan
Let’s say your good credit means you qualify for a 4% variable interest rate on that $30,000 consolidation loan. Assuming your interest rate stays at 4% for a year, and then it begins to climb 1% a year until it hits a rate cap of 10%. (Most lending companies will have a rate cap in place on variable rate student loans to protect you in case rates rise an inordinate amount.)
Again, let’s assume a 10-year repayment plan. Y’ll make payments ranging from a low of about $304 a month to a high of about $365 a month and total payments of about $41,460. As you can see, even though interest rates rose while the loan was in repayment, the variable rate resulted in the most total savings.
We made two crucial assumptions in both cases. First, you are credit-worthy enough to qualify for an interest rate on the lower end of the spectrum. Second, you can stick to a standard 10-year repayment plan for your consolidation loan instead of lengthening the term.
If you can’t qualify for a low interest rate or keep your repayment term reasonable, private student loan consolidation most likely won’t save you any money – in fact, it could cost you a lot more in the long run.
Also don’t forget that a variable interest rate is a gamble that becomes riskier the longer it takes you to pay off your loan. You should always check what kind of rate cap is in place to protect you.
How does student loan consolidation affect your credit score?
Student loan consolidation can affect your credit just like most big financial decisions, but not significantly enough that to be a major factor in your decision. Since you won’t be juggling as many separate bills, consolidation can make it easier for you to make on-time payments. Staying on top of payments and making them reliably each month is a proven way to raise your credit score over time as it demonstrates to creditors that you are a responsible borrower.
However, there are a few minor ways consolidation can hurt your credit. If a lending company makes a hard inquiry to check your credit – the basic process of running your credit score to see if you qualify for a loan – it can drop your credit score a few points. Though the damage will be negligible and short-lived as long as several lenders aren’t making hard inquiries around at the same time.
It’s also possible that when you replace your old loans with a new one, it can hurt your score by lowering your average account age. That’s because 15% of your credit score is based on the length of your credit history.
Consolidating and paying down your loan on time will actually raise your credit score in the long run as you prove your ability to handle debt responsibly.
Six strategies for paying off student loans faster
By now, it’s probably pretty clear that consolidation doesn’t offer many guarantees when it comes to saving money on your student loans. However, there are several strategies that can do just that.
Don’t forget to cover your other financial bases before you embark on any aggressive student loan repayment plan. That means being able to pay your bills, but also having an emergency fund, beginning to save for retirement and prioritizing debt that has an interest rate higher than your student loans.
You should remember that your student loans are likely to have lower interest rates and more favorable payment terms than many other kinds of debt – especially credit cards.
For instance, if you have $10,000 in credit card debt with a 19% interest rate, it doesn’t make much financial sense to spend your extra money financing a student loan with a single-digit interest rate when you’re only making minimum payments on the credit card debt.
Strategy #1: Choose the shortest repayment term you can manage
Your loan’s repayment term is the time you have to pay back the loan. Ten years is the standard, but some recent graduates extend their term to 15, 20, or even 25 years in order to keep their monthly payments low. This is a big temptation with student loan consolidation because your new monthly payment can look quite intimidating once your loans are combined.
If you choose a longer loan term, it can bring you some relief in the form of lower monthly payments, which can help you make faster progress paying down higher-interest credit card debt. However, it dramatically increases the total amount you repay throughout the loan tenure since interest continues to accrue on the unpaid balance.
Now let’s go back to Loan A, the $10,000 federal loan with a fixed interest rate of 4.5% and see how the loan term affects how much you would pay monthly and over the life of the loan.
As you can see, you can cut your monthly payments in half with the 25-year term, but you’ll have to pay more than $4,200 over the life of the loan in order to to it.
Strategy #2: Pay more than you need to each month
Again, let’s look at Loan A. Under the standard 10-year repayment plan, you would pay just under $104 a month for a total of $12,437 over the 10 years period. But if you pay a bit extra money each month this is what’s going to happen:
$113.64 (an extra $10)
$123.64 (an extra $20)
$153.64 (an extra $50)
$203.64 (an extra $100)
As you can see, paying just $10 more each month will save you a few hundred dollars over the life of the loan, and you’ll be free of it a year earlier. If you can be really aggressive, paying an extra $100 a month can save you more than $1,300 over the life of the loan — and you’ll have it paid off in just four and a half years instead of ten
Strategy #3: Prioritize your most expensive loan
Using this strategy, known as the debt avalanche, suggests that you haven’t consolidated all of your loans, because you’ll be attacking the loan with the highest interest rate most aggressively.
In the example below, we’ll go back to Loans D, E, and F. Loan D was the $5,000 loan at 5%, Loan E was a $10,000 loan at 8%, and Loan F was a $15,000 loan at 12%. Let’s go with a 10-year repayment plan to see what monthly payments and total amounts repaid on those loans would look like:
Loan D ($5,000 at 5%)
Loan E ($10,000 at 8%)
Loan F ($15,000 at 12%)
Let’s say you can pay more than $390 a month because you want to pay off the loans faster and reduce the total amount of interest you pay on them. You look at your budget and decide you can spare $550 a month for your debt – that’s roughly an extra $160 a month over the required payments.
If you finance the highest interest loan first (Loan F), you’ll be putting roughly $375 towards that loan each month (the minimum $215 plus the extra $160) while keeping the other payments the same as in the table above. That way, you’ll now be able to pay off Loan F in only four years and four months instead of 10 years.
Once you’re done with Loan F, you turn to Loan E. After 51 months of paying $121.33 a month, your balance is about $6,693. Now you have about $497 to throw toward Loan E (that’s your $550 loan payment budget minus the minimum monthly payment for Loan D, which you’re still paying). It is going to take just 15 more months to pay off Loan E at this rate.
Finally, for Loan D, which is at about $2,560 after paying $53 a month for 66 months. Now you can go at it with the entire $550 a month, which means you’ll need just five more months to pay off Loan D.
By paying a bit extra each month and prioritizing the loans based on their interest rates, you can pay them off in six years instead of 10, reclaiming four years of your life where you won’t have to make any student loan payments. And not only that, but you’ll save more than $8,000 in total interest compared to what you’d pay with a standard 10-year repayment plan.
Strategy #4: Prioritize your smallest loan
This strategy also assumes that you haven’t consolidated all of your loans, because you’ll be attacking focusing on the loan with the smallest balance first. This method is also known as the debt snowball.
We’ll once again use Loans D, E, and F for this example. You’ll go at your loans with the same extra $160 a month above those minimum monthly payments. This time, however, you start with the smallest balance: Loan D, the $5,000 loan at 5%. Putting in an extra $160 each month, on top of the original $53, means you’ll have it paid off in just two years. After that’s paid off, you turn your focus to Loan E. The balance is about $8,582 after making the $121.33 payments for two years. Now, you can redirect all the money you were paying toward Loan D and apply it to Loan E, on top of the minimum payment you’ve been making all along. Paying $335 a month, it will be gone in another 28 months.
Finally, you go to Loan F. The balance is about $10,472 after making those $215 minimum payments for 52 months. Now that you have no other loans to take care of, you can put in your whole $550 monthly budget towards it, and you’ll have it paid off in another 22 months.
So you’ll have all three loans paid off in 74 months instead of 120 months by paying a little more each month and starting with the smallest loan first. You’ll also save about $6,000 total in interest.
While we can’t say the results are as good as those of the debt avalanche plan, but they still make a huge difference. With the thrill of paying off two loans completely early, you’ll most likely be more motivated to stick with the aggressive payback plan. This is why some financial experts recommend the debt snowball over the avalanche method.
Strategy #5: Exploit any available discounts
Some lending companies may offer small breaks on your interest rate. The most common discounts are for making on-time payments over a certain period of time, setting up automatic payments, or having other existing accounts with the lender. Some lending companies may waive any existing loan origination fees. You must make sure you know which discounts your lending company offers so you can make sure you take advantage of them.
Strategy #6: Explore student loan forgiveness
There’s a way to get a portion of your federal student loans forgiven, meaning you won’t have to pay backthat certain amount. It’s no surprise that this very tempting possibility comes with some hefty strings attached. Forgiveness is a likely possibility if you embark on a career in public service, move to certain locations, join the military or volunteer with certain organizations.
Is it worth it to consolidate student loans? The answer could go either way. Here’s a summary to help you decide.
1. Consolidating your loans with the federal student loan consolidation program won’t save or cost you any significant amount of money. That’s because federal student loans borrowed after 2006 already have fixed rates, and your new interest rate will be simply a weighted average of the old ones.
2. Consolidating your loans with a private lender may save or cost you money. Very good credit is required to have a shot at savings (or a co-signer who’s credit-worthy). A tempting variable rate can be risky unless you know you can pay off your new loan in a relatively short time; fixed rates eliminate the risk of rising payments but they’ll be slightly higher.
3. If it’s hard for you to keep track of your finances, juggling multiple bills and remembering payment due dates, student loan consolidation is 100% worthwhile as it will help you stay organized and reduce the possibility of falling behind on payments.
4. It’s not wise to use consolidation as an excuse to drastically lengthen your repayment terms. By doing this, you will just pay more interest over the life of the loan. Choose the shortest term you can manage.
5. You can save a hefty amount on your student loans using strategies that don’t require consolidation, such as paying more than you’re required to each month. Variations on this strategy include targeting the smallest balance first, or paying down your highest-interest loan first. If you want to give either of these tactics a try, you won’t need to consolidate.
It’s safe to say that the days of saving a significant amount of money by consolidating your student loans with a lower interest rate are over. However, there’re still many reasons to consolidate even though it may cost more in the long run. There are advantages such as locking in interest rates on private loans, simplifying payments, extending loan term to lower monthly payments and having more financial breathing room each month.
You may have been struggling with debt and looking for a way out of this pool of indebtedness. Debt consolidation may be the best shot you have so as to avoid filing for bankruptcy and negatively impacting your credit score. Since debt consolidation loan is yet another debt, you may ask yourself ‘how much is a safe amount to borrow?’
If you take a home equity loan so as to consolidate debt, you may lose your home once you encounter challenges in paying your debt. This is because your home will be placed as collateral against the loan. Therefore, you need to make sound financial choices and borrow a safe amount of loans once you apply for debt consolidation.
Assess Your Debt Load
To find out if debt consolidation is suitable for you, make good use of the debt consolidation calculator, which is a tool that helps debtors to determine if getting into a debt consolidation program will actually reduce their debt. This is because not all situations would be suitable for debt consolidation.
A less risky debt consolidation program would be one in which you transfer your debts into a transfer card that charge a zero or low interest rate. This way, you will be better placed to pay off the credit card debt. However, such an option is only available to those who have a good credit score. Therefore, be sure to borrow a credit card loan that has a limit that you may pay in good time.
Debt consolidation loans have lower interest rates for higher amounts of loans borrowed. However, you should stay safe and take unsecured loans and borrow an amount that you can pay back given your financial situation. Use the debt consolidation calculator to determine if a certain program will suit you.
With this, you can determine if you will be able to pay off the debt in the given duration. Such careful choices will avoid chances of you being caught up in a continuous debt spiral.
Pay Attention to the Terms
With debt consolidation loans, there may be some penalties charged when you pay off the loan earlier than
expected. Therefore, before taking up a loan, ensure that there are no terms that would result in such an outcome. If this is the case, a safe amount to borrow is one that you will pay by the time stated. Also, extending the period of time in which you pay off a debt consolidation loan results in paying higher amounts in the form of interest.
Therefore, as you do research on how to consolidate your debt, you should also be keen on making sure that the amount you will borrow will be safe.
This will go a long way in ensuring that your financial situation will not be worsened and that you will not be among those people who had experienced the vicious cycle of indebtedness. If you are in debt, take conscious and well-researched choices and borrowing ‘safe’ amounts is one of them.