The Math On Student Loan Consolidation Interest Rates

You may well have heard about how debt consolidation loans get you in the way of absolute financial freedom, i.e., a life free from debt, but have you ever stopped to wonder how loan consolidation interest rates are computed?

If you have not bothered figuring out your loan consolidation interest rates, then maybe it is time to stop and think about it. After all, loan consolidation interest rates, and how much money you will owe after interest, are all that matters in debt consolidation loans.

Debt consolidation loans came about because people tend to take on too many debts at once - from the mortgage on their homes to the balances on their credit cards. People needed a solution to the stress of paying too many debts in a month and getting knee deep in debts amounts. Students especially are prone to having too many debts.

With the high cost of education, students needed a way to wipe out their loans. And what better way to wipe out loans than to take out a debt consolidation loan? Debt consolidation loans are an offspring of the need to wipe out the average consumer's myriad of debts. At their very simplest, debt consolidation loans are granted by debt consolidation loan companies or the government. What they do is round up all your debts and pay for them. A debtor, on the other hand, pays only a single monthly payment.

Fans of debt consolidation loans hail it for taking away the hassles of managing multiple debts with varying interest rates, payment due dates and payments terms. In addition, the interest rates on debt consolidation loans are much lower than the high interest loans, and the payment terms are longer - from ten to thirty years. What it means is that debt consolidation loans make debts more manageable.

There are two types of student debt consolidation loans - one issued by the federal government and the other issued by private financing institutions. Each of them have a formula for computing interest rates, although the federal government has a set cap on the interest that can be imposed on a loan. Private student loan consolidations, on the other hand, are more variable.

So, just how are student loan consolidation interest rates computed?

Interest rates vary from one private loan consolidation firms. But a typical interest would take into consideration the LIBOR or London Interbank Offered Rate. On one debt consolidation website, for example, a borrower can benefit from an interest rate that is equal to one-month LIBOR plus 1% to 1.75% of the total debt amounts.

The interest rate then increases variably every quarter - equivalent to one-month LIBOR plus a margin ranging from 5% to 5.75% depending on your credit amount. On top of the interest rate, you also need to pay origination fees, which range from zero to 5%, depending on the amount of credit.

On federal student consolidation loans, the loan consolidation interest rates are fixed, and are equal to the weighted average of the interest rates of all the loans, rounded to the nearest 1/8 percent. The interest rate is capped at 8.25%.

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