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Taking Out a Loan to Pay a Loan; Bad Idea?

Hexmage-PAHexmage-PA Registered User regular
edited July 2011 in Help / Advice Forum
I graduated from college several months ago and have student loans I'll need to pay back. My uncle's girlfriend works for a credit union, and she suggested to my parents recently a plan of action to reduce the amount of interest I'll have to pay.

If I understand correctly, the idea is to take out a loan that's interest rate is lower than the interest rate of my student loan to pay-off the student loan, reducing the amount of money I'll have to pay-out in the long run.

Is this advisable? It seems like a good idea on the surface, but I wouldn't be surprised if something like this could backfire.

Hexmage-PA on

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    DeebaserDeebaser on my way to work in a suit and a tie Ahhhh...come on fucking guyRegistered User regular
    edited July 2011
    It isn't very likely you'll be able to get an unsecured personal loan that would cover your student loan at a lower rate and for the same term.

    Deebaser on
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    ceresceres When the last moon is cast over the last star of morning And the future has past without even a last desperate warningRegistered User, Moderator mod
    edited July 2011
    Note: I am not a loan advisor person.

    It's definitely a good idea to lower that interest rate in whatever way possible, BUT if that new loan is not a "student" loan you might not get the same deferments and such if you lose your job or go back to school. Before you do this, think about how much is left on the loans, how quickly you'll be able to pay them back in your current situation, how stable your job situation is, and whether or not you'll be going back to school over the next couple years.

    ceres on
    And it seems like all is dying, and would leave the world to mourn
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    MushroomStickMushroomStick Registered User regular
    edited July 2011
    Just read the terms on both loans very carefully. Look for things like early payoff penalties in the terms of the original loan and when you're mathing out the new loan, don't forget to factor in any refinancing/transfer/etc. fees.

    MushroomStick on
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    bowenbowen How you doin'? Registered User regular
    edited July 2011
    If she can get you a deal, take it. Make sure this is still classified as a student loan. Things like deferment and forbearance are nice and all. Most loans have those provisions regardless.

    What you should be really interested in is the tax deductible interest part of student loans. If you lose a percent or two, you probably won't gain as much as the tax deduction gives you.

    bowen on
    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
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    DemerdarDemerdar Registered User regular
    edited July 2011
    Think of it as a balance transfer from one credit card to another. The only reason to do this is if the interest rates (and other factors) are better than the current loan you are in.

    Demerdar on
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    bowenbowen How you doin'? Registered User regular
    edited July 2011
    Beware fees, as well.

    bowen on
    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
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    ShogunShogun Hair long; money long; me and broke wizards we don't get along Registered User regular
    edited July 2011
    What kind of student loans do you have? Are they subsidized or unsubsidized? Are they private? I'm just curious of what your interest rate is because between my stafford and my perkins loans I pay less than 6%. No credit union in the country is going to be able to offer anything remotely close to that. I just took out a $1500 personal loan at my CU on something like ~11% and I have good credit for my age.

    Also listen to Ceres. Student loans cannot be wiped away by filing for bankruptcy. The debt will always be with you until you pay it, but because of that you can usually get a lot more help should you fall on hard times. This is doubly true if your loans are subsidized and are not private loans.

    Shogun on
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    bowenbowen How you doin'? Registered User regular
    edited July 2011
    Well my private school loans broached near 16% when I first started with good history. If he's in a similar boat it'll help. Plus if it's not classified as a school loan, woop there it goes in a ch7 or 13. A benefit, but a downside because you can't claim the interest as deductible. But if you can get it for <8%, that's worth it, if it was as high as mine at 16%. Even if you can't put it on forbearance.

    bowen on
    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
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    tinwhiskerstinwhiskers Registered User regular
    edited July 2011
    16% holy fuck.

    tinwhiskers on
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    bowenbowen How you doin'? Registered User regular
    edited July 2011
    tinwhiskers wrote: »
    16% holy fuck.

    Private loans are fun! :rotate:

    bowen on
    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
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    MrT137MrT137 Registered User regular
    edited July 2011
    Assuming OP now has a source of income, in most situations, paying off the original loan with a lower interest loan is a good idea. After all, why pay more interest than you have to? I don't see how getting it classified as a student loan will help out any. That just helps banks (or the feds) to collect in case of default. IMO, far too few people look into lowering the interest rates on current debts through refinancing. Banks (competitive ones, at least) really are giving out outrageously low rates on all types of loans.

    MrT137 on
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    bowenbowen How you doin'? Registered User regular
    edited July 2011
    Like I said, the interest is tax deductible on a student loan, but not a personal loan. That can net you something like $2500 reduction in your taxable income.

    It begs the question if you'd still be able to calculate interest paid on the loan for tax purposes even if it's a "private" loan that had been used to pay for student debts. I imagine so, though the IRS may disagree.

    bowen on
    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
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    kaliyamakaliyama Left to find less-moderated fora Registered User regular
    edited July 2011
    Student loans are nondischargeable in bankruptcy but you also have access to income based repayment, loan forgiveness for public service, and better deferment options. So it depends on your current job security, income, and loan amount. You should familiarize yourself with the way federal student loans work in a systematic way, Whig means reading up at the DOEd website.

    kaliyama on
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    illigillig Registered User regular
    edited July 2011
    This sounds like run of the mill consolidation or refinancing.... A lot of people do this after school bc you typically have separate loans for each year, and sometimes multiple loans per year even (e.g. private vs federal), and this make the overall payment process easier and neater. Do make sure its a school loan tho, since the interest deduction is helpful at tax time, at least until you hit $75K income IIRC.

    illig on
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    JasconiusJasconius sword criminal mad onlineRegistered User regular
    edited July 2011
    Many student loan consolidation services do not fall under any or all of the federal regulations that exist for student loans.

    Yes you may pay a little less in the long run.

    But you will be forfeiting basically all protection under the law if you lose your job or something.

    Only do this if you are fairly confident you will always be able to pay it no matter what.

    Jasconius on
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    BlindZenDriverBlindZenDriver Registered User regular
    edited July 2011
    bowen wrote: »
    tinwhiskers wrote: »
    16% holy fuck.

    Private loans are fun! :rotate:

    But 16%!

    Did you get in a backroom at some bar!

    BlindZenDriver on
    Bones heal, glory is forever.
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    GalFridayGalFriday Community and Social Media Manager NovatoRegistered User regular
    edited July 2011
    Also make sure that there is no penalty for early re-payment.

    GalFriday on
    @Ga1Friday is the twitter account I use to talk about everyday things. Sometimes work things. Lots of work things.
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    bowenbowen How you doin'? Registered User regular
    edited July 2011
    BlindZenDriver wrote: »
    bowen wrote: »
    tinwhiskers wrote: »
    16% holy fuck.

    Private loans are fun! :rotate:

    But 16%!

    Did you get in a backroom at some bar!

    You could say that.

    bowen on
    not a doctor, not a lawyer, examples I use may not be fully researched so don't take out of context plz, don't @ me
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    MichaelLCMichaelLC In what furnace was thy brain? ChicagoRegistered User regular
    edited July 2011
    Aside from the financial considerations, is it a good idea to mix 'family' and money?

    While it's hopefully through a major credit union and assuming you would qualify, I would think it might get awkward if something went wrong with the loan. Is the GF a banker or have a financial background, or just poster she read at work?

    From what little I know, student loans are kind of like good cholesterol; if you're going to have a loan, a student loan is the best kind to have, so the terms would have to be very good.

    MichaelLC on
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    admanbadmanb unionize your workplace Seattle, WARegistered User regular
    edited July 2011
    BlindZenDriver wrote: »
    bowen wrote: »
    tinwhiskers wrote: »
    16% holy fuck.

    Private loans are fun! :rotate:

    But 16%!

    Did you get in a backroom at some bar!

    You mean the US banking industry?

    admanb on
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