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Federal Loan Consolidation and Direct Loan Consolidation

So what is Federal Loan Consolidation? There are many people these days that get loans from banks. There are many types of loans like house renovations and such, studies, traveling and even for personal purchases. As these loans are made by banks you will get different payback rates from each bank. One of them might give you really low interest rates but it will only allow you to get small loans. Other banks might allow you to get really big loans but they will have really high interest rates. When it comes to federal loan consolidation you should know that this is not a loan from a bank. This is a loan from the federal government. By getting a loan from it you will also have access to getting federal loan consolidation. This means that you will be given the chance to consolidate you previous loan by getting another loan that will have lower or no interest rates. The consolidation is usually allowed to people who used the previous loan to pay their college or something similar. It is a really helpful thing to get federal consolidation especially if you are a student and if you have no money to pay for your college.

The best thing about federal loan consolidation is the fact that it allows students to pay back their student loans in a longer period of time and for lesser monthly payments. But the really great thing about federal loan consolidation is the fact that the interest rates, even if they might be a little higher, remain the same for the whole period of life of the loan! This means that you won’t have to worry about interest fluctuations during the payback. The federal consolidation program was first introduced in the 1980’s. But the part with the fixed interest rates was only introduced in the year 1998. People, generally students, really liked this kind of loan consolidation. You could pay back all your debts through a single one. But be careful about one thing: you might end up paying back double the amount you borrowed. Paying back the loan takes a lot of time this way and even if it might look profitable, because of the higher interest rates you might end up paying a lot of extra money back.

What are the secrets to direct loan consolidation? There are many people these days who want to get a loan. Some will want to get a loan to be able to repair their house. Others might want to get a loan just to be able to get that new flat screen TV they wanted so much! There are many other types of loans that can be made for all sorts of reasons. These loans are usually made by the normal banks. But for some types of loans you won’t have the privilege to work with these normal banks. If you are a student and if you got a few loans to pay your college tuition then you have probably worked with special banks that deal with just these kinds of loans. But if you are a student with such loans then you might want to know how to consolidate student loans. Loan consolidation is really important for students as they will be given the chance to pay back their loan much more easily! Federal loan consolidation is something that is really important to do if you can’t pay back your loans! You will surely see that it is way easier to pay a consolidated loan back rather than a normal loan. But there are some direct loan consolidation secrets and here are some of them.

Family loans are a good way of advancing funds to your adult children or close relatives at little risk. The recession and mortgage crunch of 2007 really increased the scrutiny by banks on people borrowing funds. Though the bank rates are low, banks have become extremely conservative and have heightened their underwriting rules. For this reason, it may be hard for your children to get a loan from the bank for their education, car, to start a business, or any other expenses. However, you may be at a better position to qualify for a loan and therefore, take out a loan for your child. The IRS does not have any rules that punish taxpayers who advance their children a loan, as long as the loan is advanced at market interest rates. The IRS will only require the lender to report the interest earned and pay income taxes on the interest payments only. The IRS uses the Applicable Federal Rate (AFR) as the minimum interest rate to apply for family loans with no further tax consequences. Therefore, a parent can advance funds to a child at a level interest rate of the AFR at the time of lending.

Below Market Loan Rules

If a parent chooses to advance a significant amount to a child at zero interest or at a rate lower than the AFR, he or she will still have to pay a tax on the interest differential. In other words, the parent or lender will be charged a tax on the interest that he or she would have earned if the AFR was applied to the loan. Therefore, whether a lender applies the AFR, zero interest rate or a rate below the AFR, they will pay the same taxes since the IRS will consider the taxes that should have been paid if the loan was charged at the AFR rate. To avoid the complexities of adjusting for a below-market loan, it is advisable to just charge the Applicable Federal Rate.

Take Advantage of Prevailing Low Rates

The AFR rates have really come down, especially in 2010 and 2011. The low rates enable a parent, friend, or close relative to advance funds at very low and friendly interest rates without any tax implications. For example, in April 2011, the Applicable Federal Rate for short term loans with a duration of less than three years was 0.55%. The rate for mid term loans (between 3-9 years) was 2.46%, and the rate for long term loans (more than 9 years) was 4.17%. Therefore, if a parent advanced a child a house loan to be repaid in 20 years for example, the child will repay the loan at an interest rate of 4.17% for the whole duration of the loan, irrespective of whether the AFR rises or not.

Demand versus Term Loans

The rule of applying a level AFR for a given loan throughout the duration of the loan only pertains to a term loan. Term loans are loans that are advanced with clear terms set at the start of the loan; the loan is to be repaid at a specified time or in specified installments at set dates. If on the other hand, the loan is a demand loan, then the IRS will require the lender to keep changing the interest rate with changes in the AFR. A demand loan is a loan with no set rules and the lender can demand repayment at anytime. A demand loan therefore, cannot take maximum advantage of prevailing low rates, as the applicable interest for taxation will rise as the AFR rises.

Zero Interest Small Loans

The IRS applies the AFR and the below-market-loan rules on only significant loans that are above $10,000.00. For loans below this threshold, the IRS does not require the lender to charge interest. Therefore, the loan can be distributed interest-free without any tax implications. However, if interest is applied to the loan, the lender will report the actual interest earned as income and pay taxes on it.

Rob L Daniel and partners of Limon Whitaker & Morgan, for years have helped businesses and individuals Nationwide, with their delinquent IRS & State tax problems. The firm is based in Los Angeles, California USA. [http://www.limonwhitaker.com] / Tel:888.321.6188

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