Taking a larger loan from a single lender in order to pay off the balances on many small loans is called as loan consolidation. People consolidate loans for various reasons like to bundle several loans under a single loan lender, to reduce their overall interest rates, or to dig their way out of debts. Many consumers use this strategy to get rid of high interest loans such as credit card balances, consumer loans, and cash advances.
Federal loans such as FFELP (Stafford, PLUS and SLS), FISL, Perkins, Health Professional Student Loans, NSL, HEAL, Guaranteed Student Loans and Direct can be considered for consolidated loans.
Loan consolidation helps to reduce monthly payments by converting a borrower loan term to a longer term. This extension of terms can vary from 12 to 30 years, depending upon the loan amount. As the monthly installments are reduced, repaying the loan becomes easier for the borrower. It is important to note that, due to extension of loan terms, the borrower pays more interest in the long run.
Normally, the interest rates on consolidation loans are calculated on the basis on weighted average method on the consolidated loans and are rounded up to the nearest 1 / 8th of the percent and not more than 8.25%.
Generally, it is widely believed that a student loan can be consolidated only once, but that is not true. People can consolidate their loans as many times as they want, as long as the new consolidation loan consists of at least one unconsolidated loan. But one can not change the interest rates on an existing consolidation loan by opting for reconsolidation, as interest rates on consolidation loans are fixed.
The borrower will have to start repaying the loan within 60 days of disbursement of the new loan. There are some significant advantages in opting for loan consolidation. Switching from multiple payments into single payment helps people to get a clear idea of their financial position. Lots of alternate repayments plans such as extended repayment, graduated reimbursement, and income contingent repayment are available. Facilities to lock the interest rates, including the ability to lock in the lower interest rates during the grace period are available.
There are also a few shortcomings with loan consolidations. When a borrower consolidates during the grace period, he has to start repayment immediately and loses the remaining grace period, including possible interest benefits on subsidized loans. The borrower may lose a few positive loan amnesty provisions on Perkins loan, when it is included in the consolidation loan. Perkins loans incorporated in a consolidation loan are in eligible for subsidy, meaning that the federal government will not pay the interest on the loans while the student is studying.