One of the biggest reasons people opt for debt consolidation loans is in order to pay lower interest. Here, we will take a look at how that interest is computed.
By now, most people know that a debt consolidation loan can put them on the path to financial freedom. What is not always known is how the interest rates on these loans are computed.
If you have gotten a debt consolidation loan and have not stopped to figure out how your interest rate was determined, now may be a good time to do so. If you think about it, this is really a wise decision since the two main considerations when taking out one of these loans are the interest rate and how much money will be 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 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.
When it comes to student debt consolidation loans, there are two types. One type of loan is offered by the federal government and the other is offered by private lending institutions. These two loan types each have a different formula by which they determine you interest rate. Federal loans have a cap on the amount of interest they can charge you. Private loans, on the other hand have 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 consolidations, the interest is at a fixed rate and is computed by the weighted average of the interest rates of all of the consolidated loans rounded to the nearest eighth of a percentage point and capped at a maximum of eight and a quarter percent.
By now, most people know that a debt consolidation loan can put them on the path to financial freedom. What is not always known is how the interest rates on these loans are computed.
If you have gotten a debt consolidation loan and have not stopped to figure out how your interest rate was determined, now may be a good time to do so. If you think about it, this is really a wise decision since the two main considerations when taking out one of these loans are the interest rate and how much money will be 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 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.
When it comes to student debt consolidation loans, there are two types. One type of loan is offered by the federal government and the other is offered by private lending institutions. These two loan types each have a different formula by which they determine you interest rate. Federal loans have a cap on the amount of interest they can charge you. Private loans, on the other hand have 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 consolidations, the interest is at a fixed rate and is computed by the weighted average of the interest rates of all of the consolidated loans rounded to the nearest eighth of a percentage point and capped at a maximum of eight and a quarter percent.
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