Question by G: Should I consolidate my 18,000 student loan to lock in an interest rate of 5.07%?
I’m actually like 3 seconds away from completing my consolidation application but decided I would ask Y/A first, just to make sure. My student loan totals about ,000 and was broken up into 6 dispersements. 2 of them have a fixed interest rate of 6.8 and the other 4 have a variable interest rate which used to be over 7% but since July 1st has dropped to 4.2%. If I consolidate my loan now, my entire ,000 loan will have an interest rate of about 5% for the life of the loan, and I will pay about 0 a month for 15 years. Currently I am paying 0 a month. This seems like something I should definitely do, and I was wondering if everyone agreed. The only thing I’m afraid of is if 5 years from now interest rates go done to like 1.5% and I can’t consolidate them again!
Best answer:
Answer by Reg V
Sounds like you are in the USA. I’m in the UK, but I’ve had some finance industry experience. Like you, I’d be tempted to consolidate but I’d want to check on the penalties that might be imposed if at some stage in the future long-term fixed interest rates come down significantly more and you have an opportunity to re-fix your total borrowing at an even lower rate. To do that you would have to re-finance your loan and your existing lender might want to penalise you for their loss of income. You need to suss out the terms and conditions in the proposed loan agreement and look for penalty clauses for early redemption. And, very importantly, you need to do this for your existing loan agreements too, for the same reason. You should really check out your options with a Financial Adviser but that might not be free advice.
0/month for 15 years is going to be easier to afford than 0/month for 15 years, so if it looks good after you’ve checked out possible penalties, go for it.
One more thing. I came across a problem today where someone had failed to pay a monthly instalment on a credit agreement. Because they were in default, the lender had a clause in the agreement allowing him to charge a very high rate of interest PER DAY, EACH DAY on the amount not paid, until the account was back on track – it went like this. Payment of 0 should be made on 1st of month, if it isn’t then a charge of say 20% is levied. So on day 2 the client now owes 0 for that month. On day 3 another 20% is added (it could be on the cumulative, i.e. 20% of 0, or it could be simple – another , making the total 0. If your lender has a scheme like that hidden in the small print, you’d better be careful about missing a payment. After 30 days of that sort of arithmetic you’d owe ,373 if compound interest had been applied on the cumulative balance, or maybe about 0 if it was just per day. Watch out. In this life you never get something for nothing. If it looks too good to be true it’s probably because it is.
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