It shouldn’t come as a surprise that student loans are some of the most common types of unsecured debt out there. After all, there are literally millions upon millions of people in school; with even more graduates still stuck with the bill.
Luckily, there are plenty of loan consolidation options available to help assuage the financial burden of the loan. In addition to helping you eliminate missed payments by combining your multiple bills into one, debt consolidation also helps improve your credit score because it is considered a beneficial debt to have. We’ll explore a few more reasons why it’s generally such a good idea to seek consolidation when you’ve got several loans outstanding.
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Single Payment to Avoid Defaulting on Loans
We hinted at this feature above; but it’s so significant that it’s worth taking a more in-depth look at it. There’s the fact of a single monthly payment, for starters. This also minimizes your chances of defaulting; additionally, you can even alter the terms of your monthly payment to make it lower. This preserves your credit history as you try to rebuild it.
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Avoiding the Mayhem of Different Interest Rates
Although the interest rate is a generalized representation of your credit history, different institutions employ different methods of calculating it. This means you will almost always have as many interest rates as you have credit cards and loans. Consolidation streamlines this completely by giving you a single representative rate, which is fixed for the lifetime of the loan. As for how the rate is obtained, your new lender simply averages all your other rates and rounds up a bit.
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More Manageable Payments
One of the most attractive things about federal loan consolidation, in particular, is the fact that the loan is extended:
- Standard is a 10 year repayment period
- Extended is a 25 year repayment term
- Graduated is an incremental repayment term that begins on the low end and increases every couple of years up to a certain point.
- Income-based repayment that is capped at 15% of your take-home pay; but can be as low as 10%.
This is of tremendous help to people who are having trouble consistently making the minimum payment, as it can literally slash your monthly payments in half to make them much more manageable.
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Take Advantage of Automatic Debit Discounts
As one of the many incentives that banks give to encourage you to consolidate your loans, setting up an automatic debit may come with a loan discount. This varies from bank to bank, of course; but you could save up to 1% after you’ve established a record of timely interest payments. Additionally, this ensures that you don’t miss a payment – as long as your bank account is funded at the time you set this up.
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Federal Loan Options
This next one goes specifically for federal loan consolidations; if you are unemployed, you can file for an economic hardship deferment and gain a reprieve on repayment for a maximum of three years. Similarly, you can petition to pay less, if you don’t feel the need to halt payments altogether.
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Building Your Credit
And lastly, debt consolidation helps you build or rebuild your credit. By taking the steps to pay consistently and on time, you steadily raise your FICO score. By not defaulting, you save yourself from taking a huge hit to your credit history, and place yourself on the road to being a prime borrower.