Can you use your student loans to pay off a car loan?

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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 are a student who is considering using student loan money to pay off other debt, like a car loan, this could cause big problems.

Pay off a vehicle with a student loan

Paying off your car loan with a student loan would be considered a 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, 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 seen as a misuse of funds and, if found guilty, could result in penalties, fines, or inability to take out future student loans.

Additionally, if you have to file for bankruptcy in the future, student loans have historically not been allowed to be included or released from bankruptcy. So if you accumulate a large student loan balance that you have used to pay off other loans, you could be struggling with debt. Auto loans, on the other hand, can usually be discharged in bankruptcy if they meet the requirements.

Student loan and interest 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 accrue based on your loan balance.

An interest rate of around 5% doesn’t seem so bad at first glance, but when you consider average student loan debt, it can be staggering.

Average student loan debt in 2020 reached $ 38,792, as Experian reported. 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 would probably pay around $ 20,320 in interest charges if you stick to your schedule. That’s a grand total of $ 58,320 for your student loans!

If you are considering taking on additional student debt or helping to pay off your existing loans, think carefully, as it adds up quickly and the resulting fines for getting caught can outweigh the benefits for you now. .

Advice on vehicle financing

Instead of mixing up your debts, 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 that has a monthly payment that you can afford month-to-month without breaking the bank.

If you’re about to default on your current car 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.

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