Reader Question: How to Reduce the Interest Rate on a Personal Loan

A reader emailed me with a question and asked for my thoughts and for yours as well.

“I am in the process of paying off my $5k in credit cards, (almost half done)…I made the mistake (I was ignorant at the time about money) of taking loans out for personal expenses, like my apartment and living money [while a student], with Sallie Mae as a private loan. Now I have 22k with them (the rest with Direct Loan) with 13% interest. Has anyone else made that mistake? What’s the best way to get this interest rate down?”

First of all, congrats for cutting your credit card debt in half!

As for lowering the interest rate, I’ve never worked with Sallie Mae so I’m not sure if you would have any negotiating power when it comes to the interest rate. One of my thoughts is to do a balance transfer to your credit card to get the rate lowered. BUT, there are a lot of unknowns that come with credit cards so you have to make that decision very carefully. If you miss a payment, the whole plan can backfire on you.

Another option is to try for a different personal loan to pay off the Sallie Mae loan. I’ve heard good things about credit unions so maybe that is an option. There is also Prosper.com, but the last I checked there is a bit of apprehension by some of the lenders over there.

Anyone else have any suggestions?

Posted by Tricia on May 16, 2007 at 6:50 PM in General Debt | 9 Comments »
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MOMM responded:
Posted: May 16th, 2007 at 7:07 pm
So the Sallie Mae is a student loan right? Wouldn’t it be sort of easy to just consolidate the DL and SM loans and get a lower rate all together? I had a handful of loans and consolidated into a Direct Loan loan and the interest rate is something like 2.9% (this was a few years ago, I’m not sure the rates now).
Dasha responded:
Posted: May 16th, 2007 at 7:21 pm
I also have several private student loans with sallie mae. If the money is in multiple loans, even if it is all from sallie mae, you can consolidate it. If you do that, your new interest rate will be the prime rate plus a certain amount based on your credit history. The prime is variable with the economy- but the addition is not. Find your old loan paperwork and see what the “addition” is on your old loans. Sallie Mae will not tell you what you will get if you consolidate – but htey will tell you that if your score is “excellent,” its around 1%, if its “good” then it is around 2% and so on. If your credit score is good enough to get you a better deal than you currently have, then go ahead and do it. This will also likely extend the life of your loans and thus lower your monthly payments- which is good because you can always pay extra, but if you have a tough month or two you have the option to pay the minimum. If you consolidate, you are stuck with that interest rate for the life of the loan, so do it only if you feel confident about your credit score. I don’t think there is any other way to negotiate your rate.

Hope that helps.
zen responded:
Posted: May 17th, 2007 at 7:27 am
if it’s student loans, don’t forget about deferment/hardship deferment. When I was going to school part time and living at home, working a part-time job they worked WITH me to help me pay it off without clubbing me over the head.
Jen responded:
Posted: May 17th, 2007 at 7:34 am
Regarding those low interest rate credit cards, we just switched our debt over to 0% cards and then set ourselves up for automatic payment of the minimum monthly bill. In that way, we’ll never miss a payment and end up with one of those terrifying 30+% rates! We hope to pay more than the minimum each month, but it’s good to know we’re covered if we are late.
Sam responded:
Posted: May 17th, 2007 at 9:38 am
My husband consolidated his SM loans ($30,000 worth) with another company GB and now the interest rate is 3.25% The only catch is that GB set the monthly payment so low (term went from 10 years to 30 years) that it didn’t cover the interest from month to month and never (I mean never) would have paid off the loan if he continued to send them the monthly payment as they set it. We used a loan calculator on-line (i.e. Bankrate.com) and set our only monthly payment to have the loan paid off in 10 years (the original term).
HC responded:
Posted: May 17th, 2007 at 10:06 am
For the record, you can’t consolidate private loans with federal loans. Sallie Mae offers both FFEL (subsidized Federal loans) and private loans.

Your reader should double-check to see which type of loans he received from SM, but I doubt they can be consolidated.

This isn’t an option for everyone, but what I did was to visit my local credit union and transfer my private loans (from LoantoLearn/Educap) to a bank loan. I lost the student loan interest deduction, but I dropped my interest rate dramatically. Of course, my monthly payment also went up because personal bank loans usually have shorter repayment terms.

If your reader does decide to go the credit card route, her or she should double check what the minimum payment would be on that kind of balance. It may be much more than the current payment.
Paul Nowak responded:
Posted: May 17th, 2007 at 11:35 am
1) Consider the credit card route if you have any promotional APRs. READ CAREFULLY AND DO NOT, DO NOT miss or make any payments late.

2) Prosper.com is not great for lenders, but it is a borrower’s paradise if you get an agreeable rate.

3) See if your bank can extend you a loan, or the local CU
Rob in Madrid responded:
Posted: May 23rd, 2007 at 9:34 am
I would be very very carefull with debt consolidation loans, it doesn’t deal with the underlying problem. Often what happens (to my wife and I have done it several times) is you consoidate the loan and then simply add more debt to it. A much better approach is to snowball your debts (google to term for more info) you not only get out of debt fast but you avoid the pitfall of further debt.
Tricia responded:
Posted: May 28th, 2007 at 8:55 am
Anonymous wrote:

“I have a low-interest personal loan from a credit union. As a
non-profit, they didn’t require collateral.”