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The Math On Student Loan Consolidation Interest Rates

Jan 26, 2008
One of the biggest reasons people choose to take out a debt consolidation loan is in order to pay lower interest. We will now take a look at how that interest is computed.

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 a consolidation loan and have not stopped to figure out your interest rate, it may be time to do so. If you think about it, this is an important thing to do considering that the only things that truly matter in these loans are the interest rates and how much money is owed after interest.

Debt consolidation loans were invented because people have a tendency to take on more debts than they can handle at one time. People are trying to juggle so many debts at any point in time, from mortgages to credit cards to other loans and debts. People simply needed and demanded a solution to the stress of mounting debt and multiple monthly payments. These problems are especially common in students.

With the cost of education being so high, students desperately needed a way to wipe out their education loans. Consolidation loans provided the perfect answer. What these loans do, at their core, is compile all of a persons various debts and pay for them. The debtor is then left with a single monthly payment on the loan that was used to pay off all of the old debts.

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 debt consolidation loans for students. One is offered by the United States government and the other is offered by various private lending institutions. Each of these loan types has a different formula with which they compute your interest rate, and the federal loans have a cap on the amount of interest that they can impose on a loan. Private student loan consolidation has much more variable interest.

Still, we must show you how the interest rated on these loans are computed.

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 amounts.

The interest rate on these loans rises quarterly, at the rate of one month LIBOR plus 5 to 5.75 percent of the amount of credit given to the borrower. In addition to the interest, the borrower also has to pay origination fees, which range from between zero and five percent of the amount of credit provided.

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%.
About the Author
Looking for information on debt consolidation loans , credit card consolidation or any type of loan consolidation? Consolidation Loans Advice is a goldmine for tips on all aspects of loan consolidation. Get the facts.
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