When you carry multiple debt accounts such as student loans, it is wise to consider student loan consolidation to properly manage your debt and make repayments much easier. In handling multiple loan accounts, you may run the risk of defaulting payments and adding more burden to the loan because of penalties and additional charges. This will likewise result in low credit score and reduced chances of eligibility for financing programs in the future.
What are the Benefits of Student Loan Consolidation?
The main benefit of loan consolidation is to allow borrowers to merge multiple loan accounts into one simple account and streamline loan repayment. Likewise, payment reduction is as much as 50%, making it highly affordable and easy to comply with. A well-complied repayment plan will potentially raise your credit score over the long term.
Another major benefit in loan consolidation is the absence of penalty charges when you prepay your loan in full or in part. You can pay more each month when you have the capacity at any time during the term of the loan.
While students and parent borrowers each can consolidate their loans, they aren’t allowed to combine their individual loans for consolidation. The same is true for married borrowers.
What is the Difference Between Loan Consolidation and Refinancing? Which is the Best Option for you?
For student loans, it is possible that you carry federal student loans and private student loans. In order to make the right choice on what type of consolidation to consider, here is the difference between the two:
This is the term applied to merging of multiple federal student loans into one. No fees apply to consolidate federal loans. One favorable advantage of this type of consolidation is the fixed interest throughout your repayment term. While you won’t pay less interest rate in your consolidated loan, the monthly payment will be significantly lower because of the extended term. With student loan consolidation, you have the potential to qualify in other repayment plans and forgiveness programs later on.
To be eligible for this type of consolidation, you must have at least one loan from the Federal Direct Loan Program or Federal Family Education Loan Program.
If you have a record of default in your federal student loans but have rehabilitated your loan by complying in timely payments, you may still be eligible for loan consolidation through income-based repayment plans. You cannot include private student loans with your federal loans in this type of loan consolidation.
When your student loans are issued by private financial agencies, the program that will apply for merging your loans is refinancing. The lender that is refinancing your new, single private loan will pay off all the outstanding balances of your current loans.
The chances of getting a lower new interest rate for refinancing will depend on your credit score and your consigner’s at the time of loan consolidation application. You will be charged a higher or lower weighted average interest rate on your private student loans depending on your credit score.
The interest rate may also vary anytime during the loan’s term because private interest credit rates are based on an index. If you maintain a good credit score, it’s likely that competitive rates will apply on your loan even when rate changes occur.
What are Important Factors Considered for Loan Consolidation Eligibility?
Loan consolidation or refinancing programs require strict qualifications from borrowers. Because consolidated loans are reconstructed loans in general, you will be applying for the longest possible term that can be given to you. In which case lenders balance the risk of borrowers defaulting on payments by keeping tabs on these factors:
Your financial history – Your spending behavior tells about what you prioritize or how you spend your money. Lenders would like to see that major loans are on top of your repayment list with no record of default.
Your income level and job status – Lenders require a minimum income level to qualify for loan consolidation. Lenders want to see a good potential that you’ll increase your income level in the near future even if your current income at the time of application is only at the minimum. They also look for the security of work tenure, without the high risk of being laid off anytime within the loan’s term.
A good credit score – A good credit score plays an important role in your loan application as it determines your loan amount, the repayment term and the interest rate applied on the loan. To qualify for loan consolidation, you need to have a score of at least 600. The higher your score, the higher your chances of being given a lower rate for your loan.
Your degree – Your finished degree provides lenders a good assumption that your work will give you a sustainable income apart from job security.
What are the Steps in Consolidating or Refinancing Your Student Loans?
Once you applied for a student loan consolidation or refinancing, it can no longer be undone. It is important therefore to spend ample time in determining whether this approach is for you.
Find out if you qualify –Even if you meet all current criteria but remain uncertain of your future finances, then it may be wise to wait a little longer for a better program.
Find the best lender that fits your financial goals – Be certain about just how much you can afford and stick to that, taking into consideration your income security and risks.
Study estimates from your best selected lenders – Avoid studying multiple estimates that may cause you to overthink and lose precious time on paying lower monthly amounts. Have only a few lenders’ estimates to study in order to speed up your decision-making process.
File for application and complete your requirements – Look for assistance that can help you to complete this process in the shortest possible time.
Sign your documents – Be sure to go through your loan’s agreement carefully before signing it.
Tips on How to Keep Your Debt in Check
In order to avoid default on your new consolidated or refinanced loan, here are a few tips:
Prioritize paying off your consolidated loans
Keep in mind that as you keep your payments on time you raise your credit score.
Avoid unnecessary expenses
Unnecessary expenses and acquiring non-asset loan programs will add a burden to your finances and compromise your loan repayments. Delay any major spending plans until you have acquired a higher-paying job or have paid off a good chunk of your loan.
Be on the lookout for better refinancing or balance transfer programs
If there is a potential of more savings by transferring your loan balances halfway through your term, then it probably is a good consideration.
Well-managed personal debt is an important factor in successful personal finance. By consolidating your student loans and repaying them on time, you build a strong credit record under your name that later on makes it easy for you to borrow money again when the need arises.