Borrowing private student loans can help cover education costs when scholarships, federal loans, and other financial aid aren't enough. It may also make sense if you're looking to save money by refinancing your loans once they're in repayment.However, unlike federal student loans, the terms, costs, and conditions of private loans can be very different from lender to lender—so shop around. To figure out if a deal is good for you, ask the following seven questions. And remember: Just because you apply for a loan doesn't mean you have to take it!
1. What Is Your Actual Interest Rate?
That advertised 3% interest rate may be real, but chances are you or your cosigner will need great credit to get it.
Many private lenders require you to submit an application before telling you what your actual interest rate and fees will look like. Often, these rates are based on your credit history and your income-to-debt ratio, so don't expect to get the same rate as someone else.
2. How Much Are The Fees?
Simply put, some loans come with more fees than others. Even tougher: Many of these aren't obvious to those outside of the student loan industry.
For instance, you may be charged a fee for postponing your loans with a deferment or forbearance (options you can utilize for free with federal student loans). This can be a pain if you want to postpone your payments while you're in school.
Be on the lookout for these types of fees. You can always take your business elsewhere.
3. When Do Your Payments Begin?
Some lenders will make you pay immediately; others only charge once you've stopped attending school full time. Which works better for you?
4. Can You Change Your Repayment Plan?
Private lenders are not required to let you do this. However, some may allow you to apply for lower monthly payments under certain circumstances, such as unemployment or financial difficulty, or let you temporarily pause payments during such times. You may need to pay to use these options.
Read your loan agreement carefully to find out your options. Those not guaranteed in your agreement are an additional service, and your lender may or may not continue to offer them.
5. How Long Do You Have To Pay Back The Loan?
A longer repayment period usually means lower monthly payments (although you'll pay more interest over the life of the loan). Similarly, a shorter repayment period may mean higher monthly payments—and you'll need to come up with the funds more quickly.
6. Does The Lender Have Positive Reviews?
There will always be those who are unhappy with a service or company—especially when they owe them money. However, if you read the same pros (good customer service) or cons (impossible to reach an actual person) again and again for a company, that should tell you something.
The Consumer Financial Protection Bureau (CFPB) website offers useful information for private student loan borrowers, including an annual report detailing the frequency and nature of complaints filed against several private lenders. This report includes a breakdown of lenders who received more—and fewer—complaints relative to one another.
7. Do You Feel Comfortable Taking On The Loan?
You can apply for a loan and choose not to accept it if the terms do not suit you or the cost is too high. However, once you (or your co-signer) sign the promissory note, you are both legally bound to repay this debt, including fees.
In addition, unlike with federal student loans, you're unlikely to be able to consolidate private loans to gain or restore repayment options. You and/or your cosigner may still be expected to make payments, even in the events of serious economic hardship, permanent disability, or the untimely death of a borrower (unless otherwise agreed to by the lender).
So, before signing on the dotted line, make sure you understand the terms and never borrow more than you need. Max out your federal student loan options first, since they tend to have better rates and options. It's also a good idea to work with someone who can help you (for free), like a financial aid counselor from the school you're planning to attend.