Understand the Rates, Fees, and Terms of Your Private Student Loan


It’s time to get to know your private loan a little better. This lesson provides details on interest rates, fees, and repayment terms. First let’s look at the interest rate, which is probably the biggest factor in determining how costly your private loan will be in the long run. The interest rate determines the cost of the money you borrow. On a private loan, rates can be unsubsidized and fixed or variable. Unsubsidized means the interest is accruing on the loan. It’s not being paid for you. Variable means that the rate fluctuates. So your rate might start at 6%, but it could go up to say 7% in a year and then come back down to maybe 5% later on. Most variable rates depend on economic conditions. Lenders take these conditions into account by looking at different bank rates, such as Prime and LIBOR, which are used by banks to determine interest rates on all kinds of loans not just student loans. So how does all this determine your interest rate? Lenders add to or subtract percentage points from the standard financial rate, that is Prime or LIBOR, to determine the interest rate on your particular loan. These percentage points are based on your credit history and credit score. For example, a lender might give someone with excellent credit LIBOR + 3%, Where someone with shaky credit might get LIBOR + 5%. Another factor that can affect the cost of your loan is capitalization. That’s what happens when unpaid interest is added to your principal balance. You then start accruing interest on the new higher balance. Capitalization is a very common practice, but one that can add significant expense to your loan. Be sure to find out how frequently your lender capitalizes interest so you can pay it down before it gets capitalized. While you’re at it, make sure you understand if there are any fees on your private loan. An origination fee, for example, is a fee that a lender may charge to originate the loan. Another common fee is a late payment fee similar to a missed credit card payment, which would increase the total amount of money you have to pay back. Maybe the most important thing to know about your private loan is when to expect the first bill. Some lenders don’t require payments on their private loan as long as you’re enrolled in school. But once you leave school, whether you’re done with your degree or not, chances are the bill is in the mail. Repayment terms also vary from lender to lender on private loans. The length of repayment depends on the loan terms and the amount borrowed, typically ranging from 10 to 15 years. Speaking of repayment, the next lesson is all about what to expect for private loan repayment and what’s the smartest, cheapest way to pay off your education debt.

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