Are You Ready For A Private Student Loan?
What are private student loans?
Private student loans are also known as alternative student loans, are college student loans from a lending institution that are not part of the federal government guaranteed student loan programs. They are usually not associated with generous benefits like the federal government guaranteed college student loan programs do and can often have higher variable interest rate.
When compared to Federal Loan Student Programs, Private student loans are a much more expensive source of educational college financing.
A student should not consider borrowing from a private student loan program until they have exhausted all their Federal Student Loan options.
Dependent undergraduate students applying for private student loan financing with a parental cosigner should first investigate the options offered by the Federal PLUS program before applying for an private student loan.
Private student loan pricing will consist of two important components, the interest rate and other applicable fees, which may be charged at the time the private student loan is disbursed or when the student loan enters repayment. The annual percentage rate is a value, which expresses the real cost of the private student loan and captures both of the above components. Lenders are required to provide the APR information to prospective borrowers. In addition, private student loan borrowers should be aware that the formula used to calculate APR can often change depending on whether the borrower is in school or in a repayment. You should compare the costs of private student loan products by comparing both the in school and in repayment APRs.
It is a good idea to know what rate you will qualify for before you apply. Many private student loan providers will market their products advertising interest rates as low as a certain interest rate. Unless you are a borrower with an outstanding credit history, chances are you will not qualify for that advertised lowest rate. Your APR is determined by your credit score, your debt to income ratio and, with many lenders, by the school you will be attending. A smart borrower will obtain their credit score first from one of the three major credit bureaus before starting to shop for private student loans. With this information, you will be able to get a better idea of what your APR will be before you even apply.
Though a lender will usually not be able to tell you your actual APR until you apply, they will be able to inform you of their pricing “tiers”, which are the APRs available to borrowers with excellent, good, or fair credit. Pricing tiers also vary depending on a co-borrower or no co-borrower and there credit history. As new private student loan applications has a negative effect on your credit score because lenders view the fact that you are looking for more credit as a risk, it is advisable to not apply for any private student loan product until you have some idea of the interest rate you will qualify for. If your prospective private student loan provider will not provide you any information about their pricing tiers prior to applying, you probably should not do business with them.
Ask the lender about interest capitalization. Interest capitalization is basically how often the amount of accrued interest is added to your private student loan principal. Some lenders will capitalize your interest annually, others will do it once a quarter, and some capitalize interest only once during your enter repayment. This will have a huge impact on the cost of the loan. The more frequently interest is capitalized, the more you will end up paying because you are paying interest on interest as it continues to compound.
Also, ask about borrower benefits. Most lenders will offer interest rate reductions or principal refunds if you pay your private student loan on time. Others will offer interest rate reductions when you sign up for automatic payment withdrawals from your personal bank account. If you are applying with a co-borrower, they may even offer co-borrower release option to good customers. This allows the co-signer to be taken off the student loan after a number of on time payments. Make sure you investigate all available borrower benefits when choosing a private student loan provider.