Often thought of as a last resort after other sources of funding have been exhausted, private student loans can provide the funding necessary to embark upon your academic pursuits. Here are five tips to follow when considering whether to take a loan to support your studies.
Understand How Much You Need
Similarly to any other type of loan such as a car or a house, it is important to understand the amount of funding you need to finance your studies. This goes in both directions: you do not want to take on more than you need, but you also want to make sure that you are covering your expected costs.
Unfortunately, if you take too small a loan and deplete your loan midway through your studies, you might find yourself searching for additional funds instead of studying for your finals. On the flip side, taking on a loan can be a heavy burden that will take years to pay off, so you do not want to assume a debt larger than your expected costs just because your lending institution is willing to provide the financing.
Avoid those problems by using TipRanks’ student loan calculator, which can help you understand your estimated monthly payments of your prospective loan, along with its overall cost.
Keep in mind that once you have chosen your academic destination, it’s important to research and exhaust all other sources of funding before going the private lender route. These include scholarships, grants, and financial aid, in addition to possible public student loans.
Find a Co-Signer
Finding a co-signer is a key step that can help you lower your interest rate and the overall cost of your loan.
That’s because private sector lenders will evaluate your financial history, and then issue you a loan based on their assessment of your overall risk. Of course, most students who are matriculating to college have not had the opportunity to develop their credit history, and therefore banks will view them as riskier clients and offer loans at steeper interest rates.
Therefore, having a co-signer (usually a parent or other close relative) with a healthy credit history is a good idea. The presence of a co-signer will calm down the lending institution’s risk sensors, as the lender understands that the co-signer is also committing to repaying the debt. That guarantee allows the lender to offer you a lower rate, which can save you significant money over the lifetime of the loan.
Choose a Fixed or Variable Interest Rate
Make sure to choose whether you will take a loan with a fixed or variable interest rate.
A fixed interest rate will remain constant throughout the entire tenure of the loan. This will give you certainty, allowing you to forecast your exact payments months or even years down the road.
In contrast, a variable interest rate will change based on a number of predefined factors, usually because it is pegged to an index or other benchmark. This means that your rates (and the overall cost of your debt) could rise and fall over the course of your loan.
Generally, variable interest rates start off lower than fixed options, so if you anticipate that you will have the ability to pay off your loans early, this could be the best pathway for you. The downside is that you could get stuck with a much heftier debt than you anticipated if the macroconditions change and interest rates rise.
Make sure that you fully understand your financial situation and the potential benefits and drawbacks of both options before signing on the dotted line.
Understand the Repayment Terms
It is important to understand the terms of your repayment, and to know whether the lender will expect you to begin repaying the loan while you are still in school.
For example, for most public student loans, repayment only begins 6 months after finishing your studies. This grace period allows recent graduates to find a job and get on their feet before beginning to make regular payments.
Actually, some private lenders offer this grace period as well, but others do not. Therefore, it’s important to make sure you understand your debt obligations, and whether or not you will need to begin repaying your loan during your studies.
Also, lenders may also charge a fee for the early repayment of your loan, which those with variable interest rates might be especially interested in. Therefore, it is important to verify if this is part of your loan as well.
Explore Multiple Options
It is a huge mistake to limit yourself to one proposal, and it behooves you to sample multiple providers to find the best deal.
The good news is that private lenders want your business. They make money by offering you financing, charging you interest as you repay debt. So, do not settle for the first offer that comes your way. Instead, visit at least three or four lenders to see which one can offer you the best terms.
One term to consider is the interest rate, but there are also other considerations such as whether or not they offer a grace period following graduation and or if there is a penalty for early loan repayment.
Undoubtedly, entertaining multiple offers will make sure that you are getting the best financing for you.
Conclusion: Getting the Best Deal
A private student loan can help you pay for college, filling in the gap when savings, public loans, and other grants and scholarships fall short. Before doing so, make sure that you understand how much you need to finance your studies and find a co-signer (preferably with a good credit history) to help lower your costs.
It is also important to take the time to understand the full scope of your repayment terms, including the pros and cons of a fixed or variable interest rate. Lastly, do not settle on the first offer you receive. Instead, consider multiple options to make sure that you find the loan that will best help you fulfill your academic ambitions.
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