Consolidate private student loans
Consolidation of private student loans is not a joke. Every year many successful graduates perform this exercise with a view to reduce their interest rates as publicized by the private lenders. In fact, this misunderstanding is so much in vogue that many pass out students just plunge into the whole exercise of private loan consolidation without even comparing their existing rates with the possible reduced ones to check whether really, their interest rates would squeeze or not. They just blindly follow their fellow students who may have found some benefit due to the rigorous homework which they have done before consolidating their private loans. What is the guarantee that you will also enjoy the benefits to the same extent? What if your already existing loans were financed at reduced interest rates owing to your better credit score? Then, whats the fun in again rolling over to the same exercise just for the sake of wasting your own time and even money to some extent?
You may be surprised, why in the world would I lose money, when consolidation means reduction in interest rates. But the reality is that these promotions are done by the private lenders only for improving their credibility in the market and not for really giving you any benefit. In the advertisements placed by them, they calculate average lower interest rates possible, concluding that you can save up to 45%, with a small print given at the end of the leaf let that the rates vary according to your personal credit score. In your anxiety, you miss out those small prints and when you approach their office, the story is rather very different. They make some chaotic calculations which you cannot understand even though you have mastered in commerce and finally arrive at a rate which would be almost equal to your existing loans. However, you still try to opt for consolidation for the sole reason of single lender instead of having too many petty lenders. There lies the gimmick.
Once, you have made your choice for a single lender, and then they reveal the story of origination fees. As expected, you are still on the look out of a job or in the early days of your job life and you may not be in a position to finance those charges. Then immediately, they waste no minute to console you by telling that you need not pay a single penny to them and those charges would be added to the loan amount to be repaid by you at later stages. They also insist that they charge no application fee in comparison to other lenders and as such their loans prove to be cheaper. But, the simple logic is why in the world would any business man try to earn a little less than his competitors. The answer is that they charge hidden charges which would not be explained to you at the time of commencement of loan, but if you really calculate the Annual Percentage Rates of the all your debt period, which is the original cost of the loan, you may conclude that it cost you almost similarly to what you were to pay for individual lenders previously. Then, whats the fun in this whole exercise?
The affordability of private consolidated loans depends on the interest rates being charged on those loans. The interest rates are determined by your FICO score which is dependent on your credit history. The calculations are somewhat haphazard with more weight given to the promptness with which you repay your outstanding balances. If you fail to honour your instalments by time or default, then your FICO score decreases and vice versa. The industry mandates that you should have a minimum of 650 for availing better interest rates. A score lesser to that is sure to attract higher interest rates making the consolidation a fruitless exercise. Sometimes, it may so happen that you may not have a credit history on your own and you are dependent on your parents for your living. Then their credit history is checked for the rate determination. The fortunate ones are those who earn their own living with moderate outstanding balances. But those people can easily qualify for the federal loans rather private loans and as such their participation in the private loan sector as debtors is somewhat doubtful, forget about their consolidations.
Now, after determining your FICO score, your interest rates would be fixed. Your interest rates would be according to London Interbank Offered Rate (liBOR) which is approximately 5.32% presently. A 1-1 75% interest rate is added to this rate (depending on your FICO score) in your first year of loan repayment and from the second year onwards, the interest rates are charged on a quarterly basis at the rate of 5-5.75% interest rate (depending on your FICO score). That means your consolidated private loan may cost you around 6.32% - 7.07% in the first year and around 10.32% - 11.07% from then onwards. Other than this, an origination fee of 0-5% is being charged (also dependent on your FICO score) to the loan amount which is repayable in the last installment which means that you pay interest to the amount which you have never enjoyed for the full loan term. Supposing that you take a loan of 35,000 and your loan request attracts an origination fee of 3%, and then your total outstanding loan balance would be 35,000 + 3% of 35,000 which amounts to 36,050. The additional $1,050