What is a debt consolidation loan?
If you have lots of small debts, such as credit cards and small loans, you can take out one big loan to pay them all back. This means that instead of lots of monthly repayments, you only have one large one. You also only have one interest rate to consider, which may be lower than some of your existing interest rates. It usually involves a secured loan against an asset. Suppose the asset is your car – if you don’t pay back your new loan, the debt consolidation company takes the car. However, this asset security means that companies may be comfortable giving you a lower interest rate.
What are the advantages of a student debt consolidation loan?
1. You don’t have to deal with a lot of complex payments. Instead, you just have one monthly payment to make, which might make it easier to keep on top of things. This can also be helpful psychologically, making your student debt seem easier to manage.
2. You often get a lower interest rate, as explained above.
What are the disadvantages of a student debt consolidation loan?
1. If you don’t pay it back, you lose your asset. People rarely stop to consider this when consolidating their student debts, but it is important. If your income goes down, for example, and you find yourself unable to pay back the debt consolidation loan, you may lose your car or even your house.
2. You may be paying the loan back for a much longer period of time due to the low interest rate. This means that the total you pay can be even higher, due to interest compounding and being counted for longer.
What is particular about student debt consolidation loans?
As student loan rates fluctuate so much in the U.S., it can be nice to have the fixed interest rate of a student debt consolidation loan. Your total interest may not necessarily go down, because the interest rate is calculated against the various interest rates of the student debts you are consolidating, but you will not have to worry about changes in interest rates. It can also be beneficial to your credit rating to have one large debt at a fixed rate rather than lots of smaller ones, and you may be able to build your credit rating with timely repayments. At the same time you must consider that not all student debt consolidation companies will report to credit bureaus.
Suzanne Burlton - Suzanne is a freelance journalist and playwright, specialising in theatre reviews and life and style features. She blogs at ...
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