Can you use your student loans to pay off an auto loan?
You can potentially use the money from one loan to pay off another. This is called debt restructuring, and it is generally not recommended. If you’re a student thinking about using student loan money to pay off other debt, like a car loan, it could cause big problems.
Pay off a vehicle with a student loan
Paying off your car loan with a student loan would be considered debt restructuring. It is the attempt to pay off debts along with other debts – money from one loan being used to pay off another. Borrowers usually do this to pay things off faster, avoid interest charges, or avoid missed / late payments that could lead to default.
If you have extra money on your student loans, it can be tempting to pay off your car loan. However, this can break your student loan agreement, depending on the language it contains, and could lead to problems down the road.
There are potential legal issues with using your student loans, federal or otherwise, to pay off a car loan. This could be characterized as embezzlement and, if found guilty, could result in penalties, fines or inability to take out future student loans.
Also, if you have to file for bankruptcy in the future, student loans are generally not allowed to be included or released from bankruptcy. So if you amass a large student loan balance that you have used to pay off other loans, you may end up with debt. Auto loans, on the other hand, can usually be released from bankruptcy if they meet the requirements.
Student loan interest and crisis
Remember, borrowing money to pay for your education isn’t free – lenders charge interest on the loan. Paying off your car loan with your student loans might seem like a good idea now, but it could cost you money in the long run.
Federal student loans for 2019-2020 disbursement dates have an interest rate of 4.53% for undergraduate loans and 6.08% for unsubsidized graduate loans. Most student loans use a simple interest formula, which means your interest charges stack up based on your loan balance.
An interest rate of around 5% doesn’t sound so bad at a glance, but when you consider average student loan debt, it can be staggering.
Average student loan debt in 2020 reached $ 38,792, as reported by Experian. A study by New York Life found that borrowers took an average of 18.5 years to repay their student loans.
If you have a student loan balance of $ 38,000, with an interest rate of 5% for 18.5 years, you’ll likely pay around $ 20,320 in interest charges if you stick to the schedule. This represents a total of $ 58,320 for your student loans!
If you are considering taking on additional student loan debt or helping to pay off your existing loans, think carefully, as it adds up quickly and the fines that come with getting caught can outweigh the benefits for you. you now.
Advice on vehicle financing
Instead of reorganizing your debt, try taking out a short term loan for your auto loans. The shorter the loan term, the less interest you will pay over the life of the loan. Pick an affordable car with a monthly payment that you can afford month-to-month without breaking the bank.
If you’re on the verge of default with your current auto loan, consider asking your lender for a deferral plan to temporarily suspend payments or refinance the loan for a more manageable monthly payment.
Plus, maintaining an active installment loan (like a car loan) is good for your credit score. By paying off all of your outstanding loans as a lump sum, you could be missing out on a potential positive payment history that improves your credit score. Your FICO credit score considers payment history the most important part of your overall credit score, so the key to building a good credit score is having a long-standing and on-time payment history. timely.
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