The Math On Student Loan Consolidation Interest
You may well have heard
about how debt consolidation loans get you in the way of absolute
financial freedom, i.e., a life free from debt, but have you ever
stopped to wonder how loan consolidation interest rates are computed?
If you have not bothered figuring out your loan
consolidation interest rates, then maybe it is time to stop and
think about it. After all, loan consolidation interest rates, and
how much money you will owe after interest, are all that matters
in debt consolidation loans.
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
With the high cost of education, students needed
a way to wipe out their loans. And what better way to wipe out loans
than to take out a debt consolidation loan? Debt consolidation loans
are an offspring of the need to wipe out the average consumer's
myriad of debts. At their very simplest, debt consolidation loans
are granted by debt consolidation loan companies or the government.
What they do is round up all your debts and pay for them. A debtor,
on the other hand, pays only a single monthly payment.
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, although 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.
So, just how are student loan consolidation interest
Interest rates vary from one private loan consolidation
firms. But a typical interest would take into consideration the
LIBOR or London Interbank Offered Rate. On one debt consolidation
website, for example, a borrower can benefit from an interest rate
that is equal to one-month LIBOR plus 1% to 1.75% of the total debt
The interest rate then increases variably every
quarter - equivalent to one-month LIBOR plus a margin ranging from
5% to 5.75% depending on your credit amount. On top of the interest
rate, you also need to pay origination fees, which range from zero
to 5%, depending on the amount of credit.
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%.