When it comes to private student loans, there’s a lot to track. You need to be aware of your debt’s interest rates, fees, repayment options, and other factors — all of which can majorly impact the total cost of your loans.
That’s why it’s so important to comparison shop before you apply to private loans. Here’s what factors to consider and how to decide which loan offers the best deal for your situation.
6 Details to Compare When Shopping for Private Loans
There’s a lot of things to weigh when you shop for private loans, so review each of these factors before accepting a loan. A spreadsheet can help you keep track of each category if you’re considering several lenders.
1. Interest Rates
A loan’s interest rate is essentially the fee you pay to borrow the loan, and it’s one of the biggest determiners of your loan’s cost. Private student loans set your interest rate based on your credit, debt-to-income ratio, and other factors. In general, the worse your credit, the higher rates you’ll pay.
Each lender has their own specific formula to determine your rate, which means you’ll likely be offered a different rate at each company you apply. However, most lenders allow you to prequalify for a loan and get an estimate of the rates you’re likely eligible for. You submit a few basic bits of personal information and the lender will perform a soft credit check, then you’ll get an estimate of the rates you qualify for. This will give you an idea of which lenders could offer you the best rates.
After you’ve narrowed down your selections, you can submit a formal application with the lenders of your choice. At that point, you can see if you’re approved and the final rates you qualify for. And if you’re not happy with what you’re offered, you might consider adding a cosigner to your application. A cosigner with great credit can help you qualify for better rates.
2. Length of Repayment
Most private lenders let you choose how long you’d like to repay the loan. The standard is typically 10 years, but some lenders allow you to choose a term as short as five years or as long as 20 years.
Generally, the shorter repayment term you choose, the better interest rate you’ll receive. However, a shorter repayment term also comes with higher monthly payments.
A longer repayment term can lower your monthly payment, but remember: The longer term you choose, the more you’ll likely pay. Even if you snag a great interest rate, keeping your debt longer than necessary could cost you more in the long run.
Be realistic about how long it might take to repay your debt and what monthly payment you can likely afford. You don’t want to end up struggling to afford your payments after graduation.
3. Repayment Plans
While repayment plans vary from lender to lender, there are usually several to choose from. Most lenders allow you to defer all payments until after you graduate, but many also offer the chance to make interest-only or full payments while you’re in school.
The payment plan you choose can have a significant impact on your loan’s cost, and in general, the more you can start paying off immediately, the cheaper your loan will be.
It’s also important to review the lender’s policies in case you struggle to afford points at any point. Most reputable private lenders allow you to defer (or temporarily pause) payments, but each has different rules about what situations may qualify. What happens if you lose your job or have expensive medical costs in the future? If your lender has flexible policies, that could make a huge difference down the line.
There are plenty of fees you might encounter with private lenders; origination fees, late payment fees, and returned check fees are all common. However, as with everything else, not every lender employs them.
Consider the costs these expenses can add to your loan — if one lender charges more fees than another, make sure the interest rate and other factors are enough to make up for the added costs.
5. Cosigner Removal
Many student borrowers are young people who haven’t had time to build their credit or earn a steady income. That means a cosigner may be necessary to be eligible for a private student loan.
A cosigner is another person you add to your loan; you’re the primary borrower, but if you can’t pay off your loan then your cosigner is legally responsible for doing so. Adding a well-qualified cosigner lowers the risk to the lender, and that allows them to offer you better interest rates and terms. Cosigners are often parents or other trusted adults with healthy credit.
However, the cosigner takes on a lot of responsibility when you add them to the loan. That’s why it’s nice to eventually be able to remove the cosigner from the debt later on when you’ve had a chance to establish yourself financially.
Not all lenders offer this option, so finding a lender who does may give added comfort to both you and your cosigner. However, to remove a cosigner, you usually need to be able to qualify for the loan on your own credit.
6. Other Loan Terms
When it comes to taking out a major education debt, it pays to read the fine print. Some lenders may require you to earn satisfactory grades to remain eligible, while others may offer special perks like career coaching, financial planning, or interest rate discounts for autopayments.
It can also be beneficial to consider what happens if the primary borrower dies before the loan is paid off. While no one likes to think about such scenarios, some private lenders’ terms give them the right to claim full repayment from the borrower’s estate. This is a marked difference from federal student loans, which are discharged in the case of the borrower’s death. If you have loved ones who depend on your finances, consider how your debt could affect them should the worst happen.
While these things alone likely aren’t enough to sway your final decision, you should be fully informed before accepting any loan.
5 Key Takeaways
- Each lender offers different interest rates and loans, so it’s important to comparison shop and find the best deal
- You can get prequalified for a private student loan, which will give you an estimate of what interest rates you could qualify for
- Review repayment terms and repayment plans, since this can have a major impact on your finances once you start to pay off your debt
- Many students need to add a cosigner to their loan, but they might prefer a lender who offers the option to remove that cosigner at a later date
- Read the fine print and see what added perks are offered by your top lenders