Refinancing high interest rate debt to a lower interest rate can be a great way to save money. While this strategy can make a lot of sense, there are some risks. Before signing on the dotted line, make sure you consider those risks carefully.
The student loan market has experienced dramatic growth, and Americans now owe a staggering $1.2 trillion, which is more than credit card debt. If you are making student loan payments today, your interest rate could be above 6%. The leaders in student loan refinancing offer variable interest rates as low as 1.90% and fixed rates as low as 3.50%. Refinancing to these rates could save borrowers more than $10,000.
But there are two big risks that you should consider before refinancing.
If you have a federal loan, you will give up federal protections when refinancing to a private loan. The most important protection currently offered for federal loans is income-based repayment, which can cap your monthly payment to 15% of your discretionary income. If your income stays low, the federal programs even have principal forgiveness after 20 years.
If you switch from a fixed interest rate to a variable interest rate, you will be taking significant interest rate risk. The last five years have made many of us believe that interest rates will always be low. However, history reminds us that rates can be a lot higher. Look for lenders that offer interest rate caps as a protection.
Refinancing private student loan debt makes a lot of sense. For federal student loan debt, you need to gauge the likelihood that your income could drop dramatically over the term of your loan. There are a number of lenders out there offering to refinance student loan debt, and you should shop around for the best deal. I keep an updated list of student loan refinance options, and interest rates, at my website MagnifyMoney.
Americans still have a lot of credit card debt. According to NerdWallet, the average US household debt stands at $15,863. And the average interest rates on credit cards remain above 13%.
Marketplace lenders like Lending Club and Prosper are helping people refinance their credit card debt. On average, borrowers at Lending Club are receiving interest rates that are 31% lower than their credit card rate.
However, borrowers should consider two risks before proceeding.
Most lenders charge an origination fee, which will not be reimbursed if you pay off your loan early. Although there are no prepayment penalties, the origination fee is a kind of prepayment penalty in disguise.
see more: http://www.forbes.com/sites/nickclements/2015/08/01/the-risks-of-refinancing-student-loans-credit-cards-and-mortgages/