The point of consolidating your student loans is to improve your overall financial situation. This could mean lowering your monthly payments, improving your credit score, or lowering the amount of your debt compared to your income. Some of the best ways to save money on loans are through student loan consolidation packages. When it comes to consolidating your student loans, you can make a smart choice if you know how these different incentives affect how you pay back your loans.
What the interest rate does to consolidating student loans
This small number has the biggest effect on how much it will cost you to pay back your student loan as a whole. Even a small change in interest rate can add up to thousands of dollars over the course of a loan's life.
Base interest rates for consolidating student loans are advertised the same way from one company to the next. Doing your research when looking for a lender to help you consolidate your student loans will really pay off when you start to compare opportunities to lower your interest rate.
Reductions in interest rates
Companies that specialise in consolidating student loans offer ways to save money, like lowering interest rates. Not all lenders offer lower interest rates, and those that do offer a wide range of savings percentages. With a little bit of research, you can find lenders who will lower your total interest rate by up to 1.5%.
If you pay on time, your interest rate will go down.
If you're going to pay your bills on time anyway, why not get something for it? Some lenders will lower your interest rate just because you pay on time. Some lenders, like ScholarPoint, will lower your interest rate by up to 1% after only 24 months of on-time payments.
Be aware of how many months the lender needs to pass before you can get this discount. If your interest rate goes down after 36 months instead of 24 months, you'll be paying more than you need to for a full year.
Lessening of the interest rate for auto-pay
Since making payments on time is so important, some lenders will give you a lower interest rate just for having your payments taken out of your account automatically each month.
A rate of 0.25 percent is used by many lenders and government programmes to offer discounts. But if you do some research, you can find auto-pay interest rate cuts of up to 0.5 percent. This is a triple win for the person who needs money. It means less paperwork, not having to worry about payments being late, and saving a lot of money over the life of the loan.
Reductions in principal
A principal reduction is when the lender who is helping you consolidate your student loans takes a fixed amount off the balance of your loan. Each lender has its own rules for who can get the benefit of a reduction in the principal. The most common incentive is for making a certain number of on-time payments in a row.
Principal reductions are different from interest rate reductions because the money you save goes toward your loan's remaining balance instead of the interest rate. Principal reductions may seem like a better way to save money at first, but you could end up paying more than if you had chosen a lender with a small interest rate cut.
Programs that give cash back
Cash-back programmes do just what they sound like they do. After a certain number of on-time payments in a row, usually 33 months, some companies that help you consolidate your student loans will give you back up to 1% of the original loan and put it toward your remaining balance.
When a cash-back incentive is used, money is taken off the remaining balance after you've followed the rules of your student loan consolidation lender. For example, if you got 1% cash back on your $30,000 loan because you met the requirements, your current balance would go down by $300.
How to Choose a Company to Handle Consolidating Your Student Loans
Many of the incentives are rewards for good behaviour when making payments, and they come in the form of different savings packages. Using an online Student Loan Consolidation Calculator can help you figure out how much you could save with each option.
You can save thousands of dollars over the course of your repayment term if you compare the options and savings incentives of different student loan consolidation lenders before making a choice.
