The Math On Student Loan Consolidation Interest Rates
One of the biggest reasons people select to take out a debt consolidation loan is in order to pay lower interest. We will now take a look at how that interest is computed.
Most people know by now that debt consolidation loans can set them on the path to financial freedom. What many of us don’t know is how the interest rates on such loans are actually computed.
If you have a consolidation loan and haven’t stopped to figure out your interest rate, it may be time to do so. If you think about it, this is an important thing to do taking into account that the only things that truly matter in these loans are the interest rates and how much money is owed after interest.
Debt consolidation loans came about because people tend to take on too many debts at once – from the mortgage on their homes to the balances on their credit cards. People needed a solution to the stress of paying too many debts in a month and getting knee deep in debts amounts. Students especially are prone to having too many debts.
With the cost of education being so high, students desperately needed a way to wipe out their education loans. Consolidation loans provided the perfect answer. What these loans do, at their core, is compile all of a persons various debts and pay for them. The debtor is then left with a single monthly payment on the loan that was used to pay off all of the old debts.
Fans of debt consolidation loans hail it for taking away the hassles of managing multiple debts with varying interest rates, payment due dates and payments terms. In addition, the interest rates on debt consolidation loans are much lower than the high interest loans, and the payment terms are longer – from ten to thirty years. What it means is that debt consolidation loans make debts more manageable.
There are two types of student debt consolidation loans – one issued by the federal government and the other issued by private financing institutions. Each of them have a formula for computing interest rates, even though the federal government has a set cap on the interest that can be imposed on a loan. Private student loan consolidations, on the other hand, are more variable.
Still, we have to show you how the interest rated on these loans are computed.
Interest rates vary from one private lender to the next. Typical interest takes into account the current LIBOR average. On one debt consolidation site, the offered interest is one month LIBOR plus between 1 and 1.75% of the total amount owed.
The interest rate will then rise quarterly, at the rate of one month LIBOR plus 5-5.75% depending on the amount loaned. Atop the interest, one is also faced with paying origination fees, which equal between zero and five percent of the amount of credit given to the borrower.
On federal student consolidation loans, the loan consolidation interest rates are fixed, and are equal to the weighted average of the interest rates of all the loans, rounded to the nearest 1/8 percent. The interest rate is capped at 8.25%.
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