The goal of student loan consolidating is to improve your overall financial picture; whether that means lowering monthly payments, improving a credit score, or reducing debt to income ratio. Student loan consolidating packages offer some of the best money-saving incentives in the loan industry.
Understanding how these different incentives affect your repayment can help you to make a smart choice when it comes to student loan consolidating.
The Effect of Interest Rate on Student Loan Consolidating
This tiny little number has the largest overall financial impact in regard to the total amount you will spend to repay your student loan. Even a fraction of a percentage point can equate to thousands of dollars over the lifetime of a loan.
Advertised base interest rates for student loan consolidating are similar from one company to the next. Your due diligence in shopping for a lender to handle your student loan consolidating will truly pay off when you begin to compare interest rate reduction opportunities.
Interest Rate Reductions
Interest rate reductions are money saving incentives offered by companies that specialize in student loan consolidating. Not every lender offers interest rate reductions, and those who do offer a broad range of percentage savings. With a little research, you can find lenders offering reductions of up to 1.5%.
If you’re planning on making your payments on time anyway, why not be rewarded? Some lenders offer interest rate reductions just for making on-time payments. Some lenders such as ScholarPoint offer a reduction of up to one full percentage point after only 24 months of on-time payments.
Be conscious of the number of months the lender requires before qualifying for this discount. A reduction applied after 36 months into your loan as opposed to 24 months means you’ll be paying higher rates than necessary for one full year.
Auto Pay Interest Rate Reduction
Because payments made on time are so important, some lenders will reward you with an interest rate reduction simply for having your payments automatically deducted from your account each month.
Many lenders and government programs offer reductions at a rate of 0.25%. However, with a little research, you can find auto-pay interest rate reductions of up to a full 0.5%. For the borrower, this is a triple win. It means less paperwork, no worries about late payments, and a significant amount of savings over the course of the loan period.
A principal reduction is when the lender handling your student loan consolidating subtracts a fixed percentage off of your loan balance. Each lender offers different guidelines for qualifying for their principal reduction benefit. The most common incentive offered is for completing a set number of consecutive on-time payments.
Principal reductions differ from interest rate reductions in that the savings is applied to the remaining balance on your loan but does not affect the interest rate at which you will pay off the balance. While principal reductions may initially seem like a larger savings, you could pay more than if you had chosen a lender offering a seemingly small interest rate reduction.
Cash Back Programs
Cash back programs are exactly as they sound. After a certain number of consecutive on-time repayments, usually 33 months, some student loan consolidating companies will return up to 1% of your original loan and credit this to your remaining balance.
When a cash back incentive is applied, money is actually deducted from the remaining balance after meeting the guidelines of your student loan consolidating lender. For example, after qualifying for a 1% cash back incentive on your $30,000 loan, your current balance would be reduced by $300.
Choosing a Company to Handle your Student Loan Consolidating
Many of the incentives offered are rewards for favorable repayment behavior and are presented through different types of savings packages. Using a Student Loan Consolidating Calculator online can help you calculate the potential savings of your options.
By comparing the options and savings incentives of different student loan consolidating lenders before making a decision you can save thousands of dollars over the course of your repayment term.