Private Student Loan Interest Rates

Private student loan interest rates are looking very appealing these days, especially given the fact that some of the  interest rates can be much lower than what you will find from the Federal Government and the repayment terms are becoming much more competitive.  Interest rates are essentially a fee that anyone is charged for borrowing money.  Interest rates for Private Student Loans these days are generally offered at a Fixed or Variable rate depending on what you choose as the borrower.

Priate Student Loan Fixed Interest Rate

Fixed interest rates for a private student loan is considered the safest type of loan as you are guaranteed the interest rate given to you at the time of your application for the life of that loan.   The fixed interest rate is determined by your lender and based on your credit score and credit history.  Play around with the calculator below to get a general idea of your payments over the life of your loan.  Keep in mind that most loans are paid over 10 years (120 months) and a good average fixed interest rate is 7%:

Fixed interest rates are almost always initially higher than variable interest rates, but you do not have the risk of them raising as they are locked in for the life of the loan.

Private Student Loan Variable Interest Rate

Variable interest rates can be very beneficial as well if you like to take smaller calculated risks as they are generally lower, but the rate can fluctuate.  Variable interest rates are based on a Prime or LIBOR (London Inter Bank Offering Rate) plus a margin that is determined by your lender and based on your credit score and credit history.  Lets take a look at the below example:

3.25% (the current prime rate)

+ 2.55%(The margin based on credit, determined by lender)

= 5.80% initial interest rate

The Prime and LIBOR adjust daily and banks will generally re-adjust the rates every couple of months, which can cause your rates to increase or decrease, which is why many stay away from this type of loan.  However, as stated earlier this can be very beneficial if the Prime or LIBOR rates do not change.   Ultimately, the choice of locking in your interest rate (fixed) or taking the gamble  with a lower interest rate now, that could increase in the future (Variable) is up to you.

Terminology Glossary

Prime Rate – The interest rate that commercial banks charge their most credit-worthy customers. Generally a bank’s best customers consist of large corporations. The prime interest rate, or prime lending rate, is largely determined by the federal funds rate, which is the overnight rate which banks lend to one another. The prime rate is also important for retail customers, as the prime rate directly affects the lending rates which are available for mortgage, small business and personal loans. [1]

LIBOR – LIBOR is the London Interbank Offered Rate, an interest rate at which banks can borrow money from each other. The rate changes daily. Often, a spread is added to LIBOR. This is an additional percentage of interest that reflects the risk of lending to a particular borrower.[1]

Annual Percentage Rate (APR) -Loans or credit agreements can vary in terms of interest-rate structure, transaction fees, late penalties and other factors. A standardized computation such as the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other potential lenders. By law, credit card companies and loan issuers must show customers the APR to facilitate a clear understanding of the actual rates applicable to their agreements. Credit card companies are allowed to advertise interest rates on a monthly basis (e.g. 2% per month), but are also required to clearly state the APR to customers before any agreement is signed. For example, a credit card company might charge 1% a month, but the APR is 1% x 12 months = 12%. This differs from annual percentage yield, which also takes compound interest into account. [1] 


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