Can you use a personal loan to pay off your student loan?

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Sometimes it’s easy to feel like you never pay all your student loan balance… In fact, respondents One study by the Institute of Wisconsin said it took them, on average, 21 years to pay off their student loan debt. So it can be quite tempting to look for creative ways to pay off your debt a little faster.

Personal loans can usually be used to cover any major expenses (such as weddings, home renovations or emergency expenses), but for many people they are a tool consolidate debt or pay off high-interest debt a little faster.

Average for personal loans lower interest rate compared to credit cards – according to The federal reserveThe current average annual interest rate for a two-year personal loan is 9.58%, and the average annual interest rate for a credit card is 16.30%.

Of course, the interest rate on personal loan will depend on your credit rating… And as a general rule, the higher your credit rating, the more likely you will get a lower interest rate among other more favorable conditions for obtaining a personal loan. Some lenders, for example LightStreamare actually offering an interest rate of just 2.49%. And peer-to-peer lenders like LendingClub may also offer below average interest rates (LendingClub rates start at 7.04%).

LightStream Personal Loans

On a secure LightStream site

  • Annual Percentage Rate (APR)

    From 2.49% to 19.99% * when subscribing to auto payment

  • Purpose of the loan

    Debt Consolidation, Home Improvement, Car Loans, Medical Expenses, Weddings, etc.

  • Loan amounts

  • Conditions

  • Credit required

  • Creation fee

  • Early payment penalty

  • Late penalty

Against, federal student loan interest rates will depend on the type of loan (Bachelor’s, Graduate or Parental PLUS loan), but the average rate across the board is 5.8%. And when it comes to private student loansAverage interest rates can range from 6% to 7%, but can be as high as 12.99% among large private lenders. So the idea of ​​using a low interest personal loan to pay off your student loan might seem like a chance to save on interest.

So can a personal loan be used to pay off student loan debt? It depends. Here’s what you should consider before trying this strategy.

Personal loan conditions

Interest rates on student loans versus personal loans

Interest rates on personal loans can sometimes be lower than interest rates on private student loans (depending on the lender and your credit rating, of course), but not always. The only time you will really save money by using a personal loan to pay off your student loan is if you are definitely getting a lower interest rate on the loan.

Some lenders have tools with which you can estimate which loans you are eligible for and what the likely interest rate is. Personal loan “Prosper”For example, it has an appraisal tool that can show you how much you are eligible for, what your monthly payments will look like, and how much you will pay as interest, all without compromising your credit rating. This can help you get an idea of ​​what comes next if you do decide to apply.

Personal loans Prosper

  • Annual Percentage Rate (APR)

  • Purpose of the loan

    Debt Consolidation / Refinancing, Home Improvement, Auto / Moto, Medicine or Dentistry, Major Purchase and more

  • Loan amounts

  • Conditions

  • Credit required

  • Creation fee

    From 2.41% to 5%, deducted from the loan amount

  • Early payment penalty

  • Late penalty

    5% of the monthly payment or USD 15, whichever is greater (with a 15-day grace period)

Federal student loan protection

In 2020, due to the Covid-19 pandemic, all payments on federal student loans were suspended. This the abstinence period was recently extended until January 31, 2022.… This means that borrowers of federal student loans are not required to make payments on student loans during this time, and interest will not be charged on their balances until the next year’s break ends. If you have private student loans or you refinanced your federal student loansHowever, you are not eligible for this protection.

If you take out a personal loan with the intent to use the money to pay off your federal student loan balance, you will lose all federal loan protections. It means you will not be able to qualify for any federal loan repayment programs such as income based repayment plan, grace periods, and public service loan forgiveness (PSLF), and you will also lose access to your current abstinence period.

These initiatives are designed to make it easier for you to pay off your balance as a federal student loan borrower, but they will no longer be available to you once you take out a private personal loan to pay off your balance.This can create financial stress if you really need some kind of economic relief from making payments.

Bankruptcy protection

Bankruptcy is the process by which a person can apply to have some or all of their debts written off if they are unable to pay them back. Chapter 7 bankruptcy can completely eliminate any debt you have. And while it may spoil your credit score, filing for bankruptcy provides a kind of financial reset – by improving your financial habits, you can work to restore your credit rating with time.

But most student loans are not paid off when you file for bankruptcy. According to American Bar AssociationBoth private and federal student loans cannot be repaid in the event of bankruptcy unless the borrower can prove that repaying the loan is “unduly difficult.” However, it is common knowledge that it is difficult to prove standards for excessive difficulty (here’s more on what you need to know about Student Loan Bankruptcy Filing).

However, personal loans can be repaid in the event of bankruptcy. This is perhaps one of the few benefits of paying off a student loan using a personal loan.

Other options

Refinancing is a popular option for student loan borrowers because they can usually get a lower interest rate and may even get lower monthly payments. The conditions for refinancing a student loan are also not as restrictive as when it comes to using a personal loan to pay off student loan debt. Just keep in mind that when you refinance, you usually lose federal protection for your student loans. But it might be a smart move for anyone with private student loans.

There are also many options when it comes to finding a lender who will refinance your student loans. Interest rates for refinancing a loan for SoFi start at 2.74% if you make monthly payments using auto payment. And SoFi is currently offering student loan refinancing conditions similar to those of the federal grace period – this allows borrowers to lock in a lower interest rate from 0% until December 20, 2021 and make no payments on their balance sheet until February 2022. …

SoFi Student Loan Refinancing

  • Expenses

    No refinancing fees

  • Eligible loans

    Federal, Private Loans, Graduate and Bachelor Loans, Parent PLUS Loans, Medical and Dental Residence Loans

  • Loan types

  • Variable rates (APR)

    From 2.24%; from 2.37% for doctors / dentists (the price includes a discount on auto payment 0.25%)

  • Fixed rates (APR)

    From 2.99%; from 3.12% for doctors / dentists (the price includes a discount on auto payment 0.25%)

  • Loan terms

  • Loan amounts

    From USD 5,000; over $ 10,000 on medical / dental residency loans

  • Minimum credit rating

  • Minimum income

  • Allow co-signing

If you are worried that you will have trouble paying off your loan on time, you should contact your Student Loan Service Specialist to discuss the possibility of extending the grace period on a case-by-case basis. Often, you can ask for a payment plan that best suits your circumstances.

Bottom line

Paying off a student loan is a tremendous achievement, but it can often be challenging. There are many people left pay off student loans in adulthood… And while using a low-interest personal loan to pay off your student loan can be a smart way to save money, this strategy should be very carefully considered, especially when it comes to understanding the terms and conditions of the loan.

However, there are other options for those who want a little more financial flexibility when it comes to student loan payments. Refinancing is a popular way to save on payments due to a lower interest rate. But if you feel that you cannot meet the required minimum payments on your student loan balance, contact your loan agent as soon as possible to discuss additional options.

The terms of your LightStream loan, including the annual interest rate, may differ depending on the purpose of the loan, the amount, maturity and your credit profile. Excellent credit is required to get the lowest rates. The price is shown with an AutoPay discount. The AutoPay discount is only available before loan financing. Tariffs without AutoPay are 0.50% higher. Subject to loan approval. Conditions and restrictions apply. Advertised rates and conditions are subject to change without notice. Payment example. Monthly payments on the $ 10,000 loan at 3.99% per annum for three years would result in 36 monthly payments of $ 295.20.

Editorial note: The opinions, analyzes, reviews or recommendations expressed in this article are solely owned by the Select editors and have not been reviewed, endorsed or otherwise endorsed by any third party.

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