Loan types

Loan consolidation

There are many types of loans that financial institutions and organizations offer. These can sometimes be done in collaboration with government agencies. Typically, loans are given to citizens of legal age needing financial assistance, or to students (for cases of younger individuals). For the case of students, it is assumed that these are those who still can not hold jobs that could pay enough to immediately cover the expenses of being in school for a couple of years. Loan consolidation has been designed to assist students (or parents) in managing their debts—student loans in particular.

The Federal Consolidation Loan was made to allow for multiple students loans to be combined and thus make repayment simpler, resulting to one loan payment and lender. The consolidating lender merges all the existing loans into a single new loan.

Loan consolidation has both benefits and disadvantages. Since a Federal Consolidation Loan is already the combination of all the student loans, it will have to have only one interest rate. The interest rate for loan consolidation is calculated by taking the weighted average of all the smaller loans, rounded up to the nearest one-eighth of 1 percent. This new consolidation rate might then be slightly higher since it is rounded already.

One advantage of loan consolidation is that the time of repayment is extended over longer periods (a ten-year repayment plan could be extended up to thirty years). However, as the time of payment becomes longer, so would the amount paid due to interest also increase. One good advice would be to increase payment once there is improvement in terms of financial conditions. This would not only prevent further increase in interest over the years but would also unburden the student (or the parent) from the loan sooner.

Another advantage of loan consolidation is the availability of deferments and forbearance. A deferment in loan consolidation is a period of time wherein the loan holder suspends the regular loan payments. For certain types of Federal Consolidation Loans, the government pays for the interest during the deferment period. In general, deferments are given under the following circumstances: enrollment in school, study in a graduate fellowship program, rehabilitation training program for disabled individuals, unemployment, economic hardship, and military service. Forbearance in loan consolidation allows temporarily lowering or postponing of payments. In loan consolidation, the loan holder grants forbearance when the student (or parent) is totally interested yet cannot temporarily make full or partial payments and thus are not at all fit to be granted deferment. During forbearance in loan consolidation, interest adds up, resulting to an increase in the total debt; thus is it advisable to keep on making payments not until the loan holder clearly gives a written notice that forbearance has been granted. Most loan holders grant these loan payment adjustments. In loan consolidation, it is always best to notify them early as to make the necessary arrangements.

There are also circumstances wherein a loan, or a portion of it, may be cancelled or discharged. Loan consolidation allows for certain loans to cancel each other out, thus a student (or a parent) would no longer need to pay some portions of the consolidated loan.

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