Private student loans are an excellent choice for students in need of extra funding. These loans can be obtained from banks, credit unions and online lenders alike.
Private student loans often carry higher interest rates than federal ones, so it’s essential to shop around. You could also get a private loan with a cosigner, which may reduce the overall cost of your loan.
Getting a low interest rate
When looking for a private student loan, it’s essential to shop around and compare rates. Doing some research can help you avoid paying an excessive interest rate that could cost you thousands in interest over several years.
First, be aware of how private lenders set their interest rates. Federal student loans are fixed rates; however, private lenders have discretionary power to alter their rates depending on a variety of factors such as your credit history.
Another factor to consider is your loan term, which determines how much money you pay back each month. Opting for a shorter repayment period like five, 10 or 15 years can save money in the long run.
By including a cosigner on your application, you may be eligible for a lower interest rate. On average, creditworthy cosigners can reduce your prequalified rate by 2.4 percentage points.
Getting a fixed rate
Private student loan interest rates are determined by several factors, such as your credit score, the lender’s underwriting processes and market conditions. But the best way to find a lower rate is by shopping around with multiple lenders.
If you can secure a fixed private student loan interest rate, your monthly payments won’t change over time and you’ll know exactly how much you owe for the duration of the loan. These loans tend to be more affordable than variable rates which may fluctuate based on market index changes.
You may also be able to reduce your rate by having monthly payments automatically deducted from your bank account. Doing this ensures timely payments and helps avoid late fees. Some private lenders offer a 0.25% discount when signing up for automatic payment, which can ultimately save money in the long run.
Getting a variable rate
Many private student loan lenders provide borrowers with the choice between fixed or variable interest rates. A fixed rate, which remains constant over the life of your loan, ensures you know upfront how much you’ll pay and what your monthly payments will look like.
Variable rates have the potential to go up or down depending on market conditions, potentially impacting your monthly payment and making them riskier alternatives than fixed rates.
Variable interest rates typically start lower than fixed rates, which can be beneficial if you’re trying to save money. They’re also a good choice if you don’t know how long you’ll be in college or your income is likely to fluctuate over time.
When setting your variable interest rate on a private student loan, most lenders use the London Interbank Offered Rate (LIBOR) as their index. If LIBOR increases, your rate could go up to the lender’s cap; however, if it decreases, your variable may drop below this figure and save you money in the long run.
Getting a consolidation loan
If you have multiple private student loans and wish to consolidate them into one, a private lender can assist. This process, known as refinancing, usually results in lower interest rates and a shorter loan term.
Refinancing can also make payments simpler by setting up automatic deductions from a checking account. Some lenders provide lower interest rates or more accommodating terms to those who choose this route.
Before refinancing your student debt, there are some essential things to consider. First and foremost, bear in mind that consolidating federal loans with a private lender will void the borrower benefits associated with those loans.
Before consolidating your federal loans with a private lender, be sure to assess whether you qualify for loan forgiveness and income-driven repayment options. Doing this can be especially important if you’re having trouble repaying the debt and want to reduce monthly payments.