Student Loans: Private Loan Consolidation
By Reyna Gobel
Even if you don't choose to consolidate your private loans because of wanting smaller payments, there's a profound reason to consolidate your private loans: the illustrious, coveted fixed-interest rate. Generally private loans, have variable interest rates. However, when you consolidate your loans, you not only create smaller, more manageable payments, but you can secure a fixed-interest rate loan.
How Private Loan Consolidation Works
When you wish to consolidate your private loans, you call up your original lender and ask about combining all your private loans into one larger loan. If you have more than one original lender, you can ask each bank about the possibility of combining your loans from that institution with loans from others. Since private loans are offered in the consumer market you can also compare interest rate terms to those at any bank that offers private consolidation loans. When you consolidate, you can get better interest terms than when you started if your credit wasn't as good at that time, or you can drop your cosigner from your loan. For instance, you might qualify for rate terms of PRIME plus 1% now, whereas you were stuck with PRIME plus 10% on your original loan because of your credit rating when you original borrowed the money for your education.
Special Contract Terms
In the federal student loan program, you are given guaranteed ways to postpone payment when you experience financial hardship. But with private loans there isn't a guarantee your lender will work with you when you lose your job or experience other financial difficulties. Ask your lender if it offers any provisions for temporary reprieve from making payments due to an economic hardship. If your perspective lender's representative does mention such a provision, make sure proof of the provision is offered and sent to you in written form.
The Credit Card Alternative to Private Loan Consolidation
Transferring your loan balances to credit cards doesn't sound like the best alternative, but if you receive a 0% balance transfer offer for 12 months or a 4% balance transfer offer for the life of the loan offer, it's definitely a method worth considering for transferring some or all of your private student loan debt. (For more information on this option, see Shuffle Away Your Debt With Balance Transfers.)
Before you consider transferring your student loan debt to a credit card, you'll want to evaluate the following:
- Is there an origination fee for the balance transfer? Depending on how long it will take you to pay off the loan, a balance transfer rate of 3-5% may void the benefits of transferring the loan balance in the first place.
- When will your promotional interest rate rise? If you transfer a balance to your credit card and don't pay it off during the period that your credit card offers you the promotional interest rate, your card will revert to its old interest rate. For instance, if you transfer $10,000 to a credit card but you know you'll only be able to pay off $2,000 in one year and your promotional rate expires at the end of the year, you'll still have $8,000 on your card when your promotional rate ends. This will accrue interest at the non-promotional rate.
- Will your promotional rate affect the rest of your balance? If you already have a balance on your card, you need to know if the lower promotional rate is paid off first. Under such a condition, you'll pay off your student loans at the discounted rate while the rest of your credit card balance is charged your normal rate, which could be anywhere from just below 8% to over 22%. No matter how much you pay per month, - until your transferred balance is paid off, not a penny will go toward the amount that is borrowed at the higher interest rate.
- Will your balance transfer affect your credit rating? If transferring your private loan balance onto your credit card is going to cause you to max out your credit card, you need to reduce your transfer. Your credit card balance should not exceed 50% of your credit limit. (For more on how this works, read How Credit Cards Affect Your Credit Rating.)
There isn't a negative side to consolidating your private loan debt. This is because no matter how far your loan repayment is extended, you can always pay your loan off early - and with a fixed interest rate.
Student Loans: Conclusion
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