Main benefits of loans consolidation
The main benefit of loans consolidation is that you just have a single monthly payment to deal with. The consolidation replaces multiple payments on different loans with a single payment on the consolidation loan. For example, a studentmay graduate with as many as a dozen loans. Consolidation will combine them into a single loan with a single monthly payment, thus simplifying the repayment process.
- Secondly, there are alternate repayment plans that lead to more manageable monthly payments. Debt consolidation loans provide access to alternate repayment plans, such as extended repayment, graduated repayment and income contingent repayment. Although such plans may be also available to unconsolidated loans, the terms of an extended repayment plan depends on the loan balance, which is higher on a consolidation loan. Turning to alternate repayment plans often reduces the size of the monthly payment by as much as 50% by increasing the term of the loan. This can reduce monthly payments, making them more affordable and manageable. However, it does increase the total interest paid over the lifetime of the loan.
- Loans consolidation also reduces the interest rate on some PLUS loans. For example, consolidating an 8.5% fixed rate PLUS loan reduces the interest rate by 0.25% because of the lower 8.25% interest rate cap on consolidation loans. In order to maximize the interest rate reduction, the PLUS loans must be consolidated only by themselves. It is also advisable to consider the impact of consolidation on student loan discounts.
- Loan consolidation resets the 3-year maturity of certain deferments and forbearances. A consolidation loan is a new loan with its own deferments and forbearances.
Loan consolidation is a useful tool for medical school students because they do not get an in-school deferment during the internship and residency periods. They are, however, eligible for an economic hardship deferment for no more than three years. Therefore, if they need more than three years, loans consolidation is a practical and appropriate tool for that purpose.
- Consolidation restarts the loan term on loans that are already in repayment. Even if your loans have a standard 10-year repayment period, by consolidating them when they are already in repayment, you will reset their loan terms since a consolidation loan is a new loan. This can give you similar benefits to these of an alternate repayment plan. It may yield a lower monthly payment without extending the term.
On the other hand, consolidation should be avoided when you are close to the end of your repayment term because you won’t save much.
- Consolidation allows you to change lenders, thus providing better loan discounts. Consolidating your loans allows you to choose between lenders. If you take the time to shop around, you may be able to find a better discount on loan interest rates and better rebates on the fees.
- Loan consolidation for educational loans is sometimes necessary for graduate students when applying for a mortgage on a house.
- For some borrowers with poor credit score, there are specialized debt consolidation loans for bad credit. They come in use when those borrowers are denied of standard loans. Also, there is payday loan consolidation for those borrowers who have taken out payday loans.
- Extended repayment is not mandatory. On the contrary, it is an option. This means that you don’t have to extend the repayment term because this may increase the total interest paid over the lifetime of the loan. Some lenders even encourage borrowers to extend the repayment on their loans. Therefore, you should be careful when deciding whether to extend the repayment.
Moreover, borrowers are not required to choose an alternate repayment term. They can use the standard 10-year repayment even if they consolidate their loans. It is advisable to keep a standard repayment term as this minimizes the total cost of the loan. Extended or alternate repayment term should be chosen only when the borrower experiences trouble with his monthly payments. An alternate repayment term can reduce the size of the monthly payments by as much as 50%. However, this comes at the cost of increasing the total interest should be paid over the lifetime of the loan by as much as 250% or more. Alternate repayment plans can increase the total cost of the loan by thousands or even tens of thousands of dollars.
What will my payments look like each month?
Consolidating your loans can significantly reduce your required monthly payment because they are usually amortized over 10 or 15 years. When you choose to consolidate, you may be eligible for a longer repayment period. The time period during which you have to repay your consolidation loan depends on your consolidation loan balance. This means that you are able to extend the amount of time from 10 years to up to 30 years, allowing you to pay a lower amount each month.
- Don’t forget that when you have a longer repayment term, your monthly installment amount may drop down because you will have more time to repay the debt. However, longer repayment terms usually means that you will have to pay more over the life of your loan in interest rate.
- If your current loans have variable interest rates, consolidating will allow you to have a single fixed interest rate for the life of the loan. This fixed rate is based on the weighted average of all interest rates on the loans being consolidated. If you are a student, you can review your loan details and interest rates by logging into the National Student Loan Data System (NSLDS) with your federal ID.
- Consolidation also affects the way loans are serviced. Loans consolidating makes it easier for the borrower to manage the loan debt. The borrower will receive one bill and make one payment every month for all the loans included in his consolidation.
- Most bill consolidation loans offer a lower interest rate than those you’re paying on your existing debts combined. As a potential borrower, you should make sure that it doesn’t change over the life of the loan.
Before signing any agreement, the borrower has to be sure that he knows exactly how much he will have to pay each month and that he can afford it. The monthly payment for the consolidation loan lender should be less than the payments to all other creditors combined.
- Sometimes loans consumers who consider taking out a consolidation loan are unable to make all monthly payments. Therefore, the potential borrower should make sure that the new loan offers him savings over his current total monthly payments.
- Along with the interest rate, monthly payment amount and monthly savings, the borrower should check the total interest he’ll be paying on the consolidation loan. The amount may seem high but it’s usually much less than the interest he would have paid if he had continued paying all former creditors individually – especially if he’s only making minimum payments. It is possible to reduce the amount of interest through an alternative payment plan which sometimes allows early pay off of the loan.
- Some lenders may offer flexibility in the due date of your bill consolidation loan. If you paid twice a month – for example, on the 1st and 15th – you may ask to set a due date that corresponds with your paycheck’s schedule to be able to make your monthly payment.
- The lender should tell you the exact terms of your bill consolidation loan. It should typically be provided in months rather than years. For example – 36 months rather than 3 years. Make sure you’re comfortable with the repayment period of the loan.
- The lender may offer flexible due dates as well as alternative payment plans, such as weekly or biweekly payments. Many loan borrowers find it easier to spread payments over two or more per month, rather than repaying all at once. This may also help paying off the bill consolidation loan more quickly. Be sure to ask how such an alternative payment schedule may affect the interest you pay over the life of the loan.
- Always look for a consolidation loan lender who doesn’t charge a pre-payment penalty for paying off your consolidation loan earlier. A reputable lending company will not charge a fee for an early payoff as their goal is to help their clients get out of debt as fast as possible.
- A reputable lending company will offer their clients fast and effective ways to get in touch with them. You should know the ways to keep in touch with the company handling your bill consolidation loan and whether you’re assigned a personal loan representative or not. You should keep all phone numbers, email addresses and websites accessible in case you’ve questions or concerns.
How long will the loans consolidation process take?
A common question borrowers will ask is how long it will take to get a personal consolidation loan.
- Typically, it would take between 30 to 60 days from the approval of the loan until the loans consolidation is complete.
- Nevertheless, if the borrower provides the lender with all the necessary information, this may help significantly reduce the time required to pay off the old loans.
- Borrowers should continue making payments on their loans until the lender notifies them that this isn’t necessary anymore because the loans have been paid off. If an overpayment occurs, it will either be forwarded to the new lender or be refunded to the borrower.