Loan consolidation in USA and UK?
Loan consolidation in 4 steps? Student Loans, Scholarship Programs… it’s all about loan consolidation: A Way to Debt Consolidation?
Loan consolidation means taking one single loan to pay off other loans that you may already have. This is often done in order to get a lower interest rate, thus securing a fixed interest rate or for the convenience of paying only one single monthly loan installment.
Loant consolidation, also referred to as debt consolidation, can come from a variety of unsecured loans into another unsecured loan, but more often it entails a secured loan against an asset serving as collateral: this is most commonly a house or something of great financial value. In the case your house is used as a collateral, the loan consolidation is secured against the house. The collateralization of the consolidated loan allows lower interest rates because by collateralizing the asset owner agrees to allow the forced sale, commonly referred to as foreclosure, of the asset – your house – to pay back the consolidation loan. The risk to the lender is thus reduced so the interest rate offered is lower, but this way the risk for the borrower is certainly higher.
Student loan consolidation
In the United States, federal student loans are consolidated somewhat differently than in the UK, as federal student loans are guaranteed by the U.S. government.
United States: Student Loans USA
In a federal student loan consolidation, existing loans are purchased by the Department of Education . Interest rates for the consolidation are based on that year’s student loan rate, which is in turn based on the 91-day Treasury bill rate at the last auction in May of each calendar year.
Student loan rates can fluctuate from the current low of 4.70% to a maximum of 8.25% for federal Stafford loans, 9% for PLUS loans. Upon consolidation, a fixed interest rate is set based on the then-current interest rate. Reconsolidating does not change that rate. If the student combines loans of different types and rates into one new consolidation loan, a weighted average calculation will establish the appropriate rate based on the then-current interest rates of the different loans being consolidated together.
Federal student loan consolidation is often referred to as refinancing, which is incorrect because the loan rates are not changed, merely locked in. Unlike private sector debt consolidation, student loan consolidation does not incur any fees for the borrower; private companies make money on student loan consolidation by reaping subsidies from the federal government.
Student loan consolidation can be beneficial to students’ credit rating, but it’s important to note that not all federal student loan consolidation companies report their loans to all credit bureaus.
United Kingdom: Student Loans UK
In the UK Student Loan entitlements are guaranteed, and are recovered using a means-tested system from the students future income. Student Loans in the UK can not be included in Bankruptcy, but do not affect a persons credit rating because the repayments are recovered from the students future salary at source by the employer before any income is paid, similar to Income Tax and National Insurance contributions. Many students however, are struggling with debt well after their courses have finished
The level of personal debt in the UK has also risen astonishingly in recent years:
Total UK personal debt at the end of February 2008 stood at £1,421bn. The growth rate increased to 8.9% for the previous 12 months which equates to an increase of £111bn.
Concerns anyone?
In recent years, reports in the media have raised concerns about the use of consolidation loans. The worry is that many people are tempted to consolidate unsecured debt into secured debt, usually secured against their home. Although the monthly payments can often be lower, the total amount repaid is often significantly higher due to the long period of the loan. Debt consolidation sometimes only treats the symptoms of debt and does not address the root problem. In some circumstances, snowballing debt may be a better solution.
Alternatives
Other options available to overburdened debtors include credit counseling, debt settlement and personal bankruptcy. Some consolidation lenders will renegotiate with the creditors on the debtor’s behalf, as a credit counselor does.
