For students and families looking to fill a gap in their college financial aid, private loans may be a necessity. By shopping around for the best interest rate, borrowers could save thousands of dollars, according to a recent review of private student loans for students and families in Iowa.
The Iowa Attorney General’s Office surveyed student lenders to better understand the state of private lending in Iowa.
The lenders surveyed were identified through lists that educational institutions in Iowa provide to students. The Attorney General’s office reviewed a total of 7,803 fixed interest rate loans from 10 lenders who responded to the survey.
- A higher credit score does not guarantee a lower interest rate.
Overall, the rates offered for private student loans during the recent survey period decreased compared to those offered during the last survey period (2017-18). This reflects trends seen in other credit markets.
Analysis of the data collected shows that just because borrowers or co-signers have a high credit rating, they will not always receive the lowest interest rate available. Our analysis found that, in some cases, a borrower with an “excellent” credit rating received the same or higher interest rate as a borrower with a “bad” credit rating. However, on average, a higher credit rating correlated with lower interest rates.
Based on this analysis, it is crucial for borrowers and their families to research the best rate and save money when financing their education.
For example, a borrower with an “excellent” credit score of 750 and above who borrows $ 10,000 at the highest rate available to borrowers in Iowa will earn between $ 592.55 and $ 7,367.47 more in interest. compounds in the four years he delays repayment while in school only if he had borrowed the same amount from the lower-rate lender during our investigation period. Over a 10-year repayment period, this borrower will pay about $ 1,500 to $ 29,700 more for the loan than he would have paid with the lower rate lender.
- The prices advertised do not always correspond to reality.
The interest rates received by borrowers did not always match the rates advertised by lenders, according to our analysis.
Lenders often advertise their lowest rate even though most borrowers do not qualify for that interest rate. This deviation from advertised rates may benefit some borrowers: Four lenders lent at lower rates than advertised. Yet other lenders surveyed were offering Iowa borrowers higher interest rates than advertised. This demonstrates the importance of shopping around for student loans, as advertised rates and offered rates may differ.
Fill out a request and compare the actual rates and conditions offered to you.
- Variable rate loans could get expensive
While our survey looked at fixed rate loans, many Iowa residents borrow variable interest rate loans. Variable rates may appear lower than fixed rates because they are expressed in a “margin” plus “index” format, requiring borrowers to determine the current value of the applicable “index” and add it to the “margin” To understand the rate being offered.
However, a variable rate loan can be risky because the rate will adjust as the index changes and could significantly change the monthly payment.
While it is possible for an index to decline or remain stable during repayment, borrowers should consider the potential for increased payments and compare variable rate loans to the stability of a fixed rate loan. Currently, the indices are at a relatively low point, which means that rates will likely increase significantly over the payback period.
Better tips for borrowing
Borrowing private loans can be a necessity for many Iowa residents and their families, but there are ways to make sure you make smart borrowing decisions and keep the overall cost of borrowing down for college.
1. Exhaust all other financing options first. Only borrow a private student loan after you’ve exhausted all other options, such as scholarships, grants, work-study, institutional payment plans, and federal student loans.
2. Know your credit score and its value. Some lenders publish the rates they offer for each credit score. Find these lenders to get a good baseline for the rates you should be getting from the lenders.
3. Shop around. Not all loans are created the same and you may receive very different terms from different lenders. Shopping around gives you a much better chance of getting the best rate. Consider applying to various financial institutions, including state or national banks, credit unions, and nonprofit lenders, as their rates and terms may differ. Taking the time now can save you thousands later.
4. Don’t accept the first offer. Let lenders know if you’ve received a better offer than theirs and give them a chance to meet or beat it. If they can’t, you’ll know you have the best deal.
5. Don’t be afraid of credit checks. Credit bureaus will generally process inquiries within a short period of time as one credit application after loan selection, so borrowers should not hesitate to apply for private loans from multiple lenders; that’s the only way to know you’re getting the best deal.
6. Don’t be fooled by the teaser rates. The prices advertised and the prices offered are often very different. Fill out an application and compare the actual rates and terms offered to you by different lenders.
7. Include fees. Some loans offer a 0% origination fee, but others may charge a lot more. Take these additional costs into account when you compare loan offers.
8. Understand all of the terms of your loan. The interest rate is not the only factor to consider when comparing loans. The repayment term, capitalization of interest, and additional fees can significantly affect the overall cost of a loan. Make sure you compare all aspects of the loans you are considering.
9. Understand the risk of choosing a variable rate loan. If you choose to borrow a variable rate loan, be sure to budget for the possibility of increasing the monthly payments when repaying.
10. Don’t borrow more than you need. Review your budget to make sure you’re living within your means and not borrowing to finance an expensive lifestyle. Roommates and ramen mean less to repay after graduation and more of your monthly income for other expenses.
Learn more about private student loans on the Iowa Attorney General’s website https://www.iowaattorneygeneral.gov/.
Tom Miller is the attorney general of Iowa. He can be contacted at [email protected]