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Debt consolidation has become a common tool for eliminating debt. However not all debt should be consolidated. There are some types of debt that due to their nature are not suitable for consolidation and the consequences of consolidating those loans are mainly an increase on the costs of financing. Subsidized loans are an example of these.
For example, most student loans and loans for first time homebuyers have promotional interest rates that if consolidated would turn out more onerous. Thus, when consolidating, you should be well aware of which debt you need to consolidate and which debt you need to leave aside. Sometimes it is even better not to consolidate at all.
Subsidized Loans
A subsidized loan is a loan that features a low interest rate because the rest of the costs are paid either by a third party or waived by the issuer. These loans are intended to compensate those going through underprivileged situations or to reward a particular merit. Thus, these loans are awarded according to needs or according to merit and not on a first arrived - first served basis.
Most federal student loans that have the interest rate subsidized are awarded according to the needs of the applicants and most private student loans are awarded according to merit. In either case, the applicant will pay a significantly lower interest rate for the money borrowed than if he had applied for a regular private student loan.
Why Subsidized Loans Should be Left Aside of Consolidation
These loans carry low interest rates and it is rare to find consolidation loans carrying a lower rate than the one charged by them. Thus, it makes absolutely no sense to exchange cheap debt for expensive debt. The smart thing to do is to leave subsidized loans aside from debt consolidation and concentrate on other more expensive debt like unsecured personal loan, credit card and store card balances, etc.
There is however, a situation in which it does make sense to consolidate subsidized loans paying a higher interest rate in the process. If the monthly payments of these loans or all your loans combined are not affordable and you would benefit from consolidating with a longer repayment program and thus reducing the amount of money you spend each month, then, paying a higher interest rate as long as it is not too high may be worthwhile.
Mortgage Loans
Other loans that are not suitable for consolidation are home mortgage loans. This is because most mortgage loans carry low interest rates due to their secured nature and thus, you wouldn’t benefit from consolidating them. The same goes to most home equity loans and lines of credit that carry also low interest rates.
In this case, what you can do is refinance these loans if you need to reduce the monthly payments. You’ll get lower installments at the cost of a higher interest rate. Unless you had bad credit when you obtained them and you credit improved since then. In this case you might be able to extend the repayment program and get a lower interest rate too.
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