Student loans come in many shapes and sizes. While federal student loans feature low-interest rates, private student loans offer benefits like flexible repayment schedules and fixed rates for life. You may be wondering if fixed interest rates on private student loans are a good idea. In this article, you’ll look at why you should or shouldn’t choose a fixed rate for your education funding needs.
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Private lenders offer a variety of interest rates on student loans
Private lenders offer a variety of interest rates on student loans. Interest rates vary by lender and are based on the borrower’s credit score, income and other factors. Some private lenders offer low fixed interest rates for a certain period. For example, you can get an introductory rate of 4% or lower for the first six months after your loan is funded or until you graduate school. You must check student loan refinance rates, too; you might find better rates.
Variable rates may start out low but can increase over time
A variable interest rate may increase or decrease over time. This can happen for several reasons, including:
- The current market rates change and dictate the new rate you’ll be paying on your loan.
- You’re late on payments and have to pay penalties. In this situation, your lender will likely raise the interest rate you’re paying to offset their losses when you’re past due on payments.
The upside of a variable rate is that it can start out low compared to fixed rates but rise over time as the market fluctuates. However, suppose market conditions change unfavorably for borrowers like yourself. In that case, your variable rate could be higher than what would’ve been available had you chosen a fixed-rate option instead!
Fixed interest rates are stable over the life of your loan
When deciding whether to take out a fixed or variable interest rate, it’s important to consider your finances. For example, if you plan to pay off your student loan in a short time, then a fixed rate will save you money over your loan.
This can be especially important if you know that you’ll be paying back your student loans within the next few years because the difference between a low interest and a high-interest rate could add up quickly over time. However, if it looks like it will take longer than five years for you to pay off your student loans—and this is probably true for most people—then taking out an adjustable-rate loan (like most private student loans) may end up costing less than getting one with fixed rates.
Lenders consider many factors when setting interest rates
Lenders consider many factors when setting interest rates. First, they look at your credit history and current debt, as well as your income and employment history. The higher your debt-to-income ratio, the more expensive it will be to borrow money.
Private student loan lenders also consider a few other factors:
- Your credit score and any past bankruptcies (although student loans are exempt from bankruptcy).
- Your cosigner’s credit score and finances.
Hopefully, you better understand how interest rates are set on student loans. As you consider your options, consider the potential risks and rewards associated with variable versus fixed rates. If you’re ready to apply for a private student loan, visit the expert lender’s website today!