Looking for the right private lender for student loans is a daunting experience. There are many potential lenders out there, and it can be a time-consuming task to carefully examine the terms and options available from each one. Just some of the considerations a borrower should look for are interest rate, term length, chance of being approved, potential cosigner release, and options for deferment. Whether you are looking for a private lender for the first time or thinking of switching lenders between semesters, here are five features to consider before deciding who to use for your next loan.
The interest rate is usually the first variable that borrowers look for, and is the easiest one to compare across different lenders. Since the interest rate determines how expensive borrowing will be, it deserves to be the first consideration. If one lender will offer you a 5% interest rate and another lender offers a 15% interest rate, there would have to be some extremely compelling additional factors in order to forego the rate that is three times less expensive. However, since interest rates depend a lot upon a borrower’s creditworthiness, most people will find a large number of lenders willing to offer a loan at similar rates. Once you’ve narrowed down a list of lenders to the few that offer the least expensive interest rates, it will require looking at other factors to make a final decision.
Private student loans are typically offered in terms of around 10-15 years, but it is possible to find lenders willing to extend that to 20, 25, or even 30 years. Keep in mind that longer terms typically come with higher interest rates. It is easier for a lender to make a prediction about the financial market in the short-term, and much harder to predict long-term. For this reason, lenders will charge a higher interest rate for long-term loans because the guaranteed higher return on their money helps to shield them from the ups and downs of the market over a longer span of time. When deciding upon a loan term, keep in mind that longer terms result in smaller monthly payments, but also in more money paid to the lender in interest, both because of typically higher rates and the fact that the loan isn’t being repaid as quickly.
Chance of Approval
Every time you apply with a lender, one or more of the credit reports from the three big credit bureaus will likely report a “hard inquiry.” A hard inquiry means a potential creditor has checked your credit. Too many hard inquiries in too short a span of time can bring your credit score down, because it’s an indication that you are possibly taking out several loans. That’s why it is a good idea to gauge your chances of approval with a particular lender before deciding whether to apply. Some private student loan lenders post the average credit score and income of successful applicants on their website. For those that do not, check secondary websites devoted to student loan comparisons, which often post these statistics. If your own numbers fall well short of their typical approval criteria, move on to another lender or look into getting a cosigner. Don’t be afraid to email or call the customer service line of the lender you’re looking at and ask them how they evaluate cosigners and how having one will affect your chances of approval.
In the world of private student loans, having a cosigner is more common than not having one. Often a cosigner is a parent or other relative, and sometimes it is a spouse or good friend. Whoever your cosigner will be, if you have one, make sure they fully understand their commitment before agreeing to be jointly responsible for your loan. A cosigner is obligated to make the monthly payments on your loan if, for whatever reason, you stop paying. Since your loan term might be anywhere from 10-30 years, that’s a big commitment. Many lenders agree to release a cosigner from the loan after a certain length of time has passed with satisfactory payments. If you plan to use a cosigner, ask the lenders you’re considering applying with to send you information on how and when they release cosigners, and make sure your cosigner also gets this information so they can make a fully informed decision. For instance, a lender willing to release a cosigner after 24 successful payments would be preferable to a lender who will not release a cosigner at all or who wants many years of successful payments first.
Options for Deferment
In a perfect world, every borrower would graduate with a great job, spend the next several decades advancing in a successful career, and pay off their student loans in a timely manner. In an imperfect world, however, we know that no one is immune from layoffs, unexpected illness, and other life events that can derail even the best intentions. That’s why it is important to consider what options potential lenders can offer for loan deferment. Many lenders will defer your monthly payments if you go back to school for a second degree or face a few months of financial trouble due to job loss or a chronic illness, but some will not. Before making a final decision with a lender, be sure to inquire about what deferment options will be available to you should you need them.