Private loans are a source of funding meant to supplement (not replace) borrowing through federal student loans. For many students, federal loans aren’t enough to cover the cost of attendance. In this case, private student loans may be an appropriate option.
With so many options, choosing a lender can be a daunting task. However, if you understand the basics of how to properly shop for private loans, finding the right student loan can be relatively painless. Here are some tips on how to select and apply for the right private student loan:
- Compare Private Student Loans – While federal loans are regulated to have the same rates and fees, private student loans come in different shapes and sizes. So it’s important to compare different private student loans across many different variables and features to find the right product for your needs.
- Look at the APR – The Annual Percentage Rate (“APR”) on a loan factors in all the costs associated with the loan so that you can compare one loan to another on an apples-to-apples basis. Interest rate alone is not an adequate point for comparison. For example, a loan with a high interest rate might look worse than a loan with a lower interest rate, but high fees on the lower-rate loan mean that it might actually be more expensive. The APR would reflect this difference.
- Also compare total cost of loan, or “price” of loan. This takes repayment terms such as interest rates and timeline for repayment into consideration. Your need for $5,000 today, may cost you considerably more if paid back over the course of 10 years. APR expresses a similar point of comparison, but it’s often useful (and sobering) to see how much a loan might cost you over time. Remember – loans with shorter repayment terms will usually cost less than those with longer repayment terms.
Some lenders now require interest only payments while in college which considerably lowers the total cost of the loan. Paying that extra few dollars each month while you’re in school, could save you a much larger amount of money compared to a longer repayment term loan once interest is compounded.
- Apply with a creditworthy co-signer – in the current credit crisis a cosigner will almost always be required for an application to get approved. And not just anyone will fit the bill – the cosigner must have strong credit (credit score of 700 or higher) and verifiable income. For best results on your student loan application, apply to the loan while your co-signer is present.
- Only borrow what you need. Not a penny more. Since you’ll be paying back this loan with interest, you’ll only want to borrow what you need.
Remember to start early on your college funding search this year, as changes in the student loan and credit markets may affect your ability to quickly find funding. If you’ll need a student loan, remember to always compare private student loans to find the loan that best fits your specific needs.