Private Student Loan Comparison: Know Before Applying
April 25, 2019
Due to the rising cost of a college education, 14% of bachelors degree recipients graduate with private student loans, with an average private loan debt of $18,550. These loans are often necessary to fill the gap between federal financial aid, personal/family savings, and the total cost of tuition & living expenses.
Scholarships, grants, and federal loans are the go-to products that most students lean on to afford attendance, but in many cases these funds simply aren't enough. When this is the case, families often explore private student loans, which are issued by banks, private lenders and credit unions.
Be cautious about how you use private student loans
Using private student loans for your school expenses can have its drawbacks but only if you haven’t done your homework first. One of the main disadvantages linked to private student loans is that they are credit-based loans with sometimes misleading fixed and variable interest rates. For people with poor credit, interest rates will generally be much higher than rates offered by federal programs. But for those with excellent credit, private loans could be very competitive and come without any closing costs or fees. Borrowers who do their homework to compare student loans are often pleasantly surprised at the reasonable terms offered.
Again, private loans used to fill financing gaps in your student aid package can come at a high price—but only if you aren’t keen to the details. To make sure you get the best deal, a side-by-side rate comparison is absolutely critical, and the 5-10 minutes it takes to do so could save you from making a costly mistake.
Compare student loans BEFORE you apply
Purefy’s student loan comparison tool allows you to see multiple opportunities and find the best plan that fits your needs before applying. This is the key to discovering the best private student loan, but before you start, there are a few aspects you need to keep in mind.
Almost every private student loan comparison site, tool, and directory accept paid placement for their listings. This means the loan options you are presented in a “top 5 lenders” list are quite possibly ranked using criteria to maximize the lister’s profit and not necessarily those which minimize your total cost as a borrower. Also (and probably the most frustrating element), most websites also rank loans using “teaser rates,” not the actual rates you will receive. These low rates are a compelling way to get you to complete an application. Unfortunately, only after uploading all your supporting documents will the real rates be presented.
To be fair, I have little doubt that one of any given “top five” student loan program listed will be a good fit. However, there is little or no way to tell which you should choose. Why? To get the best deal you need to compare more than just interest rates. You should look at various repayment options which best fit your needs, including interest only payments, as well as other features like deferment, ACH discounts, and perhaps most important of all…great customer service!
One size certainly does not fit all, and shopping for loans by comparing low teaser rates is the number one way to lose money.
Beware of the “best” student loan rates
Private student loan rates factor in loan term, loan limit, and credit history. Lenders are also increasingly using market and proprietary risk assessments, and you may find that two people receive dramatically different rates with otherwise similar loan options. Note that the lenders with the lowest listed interest rates aren’t necessarily the ones that will provide YOU with the best rate. A lender’s publicly advertised rate is only possible under certain conditions, and those conditions likely have factors that are not disclosed to you up front.
Understanding lender risk
Student lending is an interesting business which many people don’t understand. In support of lenders, you must remember they are offering to assist you by financing a non-tangible item (knowledge) which can’t be revoked should you prove unable to repay the loan. As you might imagine, this comes with a greater risk than auto loans or mortgages, which are secured by an asset. Knowing this in advance provides better insight into why each lender may assess risk (and in turn determine your interest rate) in entirely different ways.
With all these different perspectives, you may find that rates for the exact same applicant can vary by a couple percent or more, depending on which program you choose. Therefore, it is imperative to compare multiple loan options before committing. For instance, each lender may have its own “sweet spot” for certain types of borrowers, and there’s no way of telling which one you fit without independently comparing before you apply.
Use a co-signer to get better student loan options
There is a huge difference between qualifying for new student loans and qualifying for student loan refinancing. Undergraduate students usually don’t have an established credit history making it difficult to get approved for private student loans on their own. This is often solved by adding a cosigner, which generally allows students to qualify for significantly better rates. A good cosigner must have excellent credit and will be responsible for repaying the loan should you fail to do so.
Warnings before you compare and apply
The best private loan comparison site should provide the student with actual interest rates and fees. This is the only way to ensure the user gets a comparison based on relevant information rather than hidden or undisclosed biases (potential or actual).
The comparison also site needs to minimize the impact on the student’s credit score, as each formal inquiry which pulls your full credit report can potentially reduce your credit score. A single inquiry could shift you from one credit tier to the next which may increase your total borrowing cost.
The solution to finding the best private student loans
To date, no single loan comparison tool is perfect, but I am very passionate about Purefy’s own rate comparison tool. You only need to answer a few very basic questions to see actual lender rates and terms, and there is no impact to your credit score. We have designed it to be extremely simple and transparent while allowing users to quickly view personalized options from vetted lenders. Within minutes you can easily compare rates, monthly payments, and life of loan cost from multiple lenders for both new private student loans and student loan refinancing.
Always maximize your grants, federal loans, and scholarships first. But when additional funds are needed, it’s time to begin comparing. Lender lists from financial aid offices and most of the “best student loan” websites don’t provide you with actual rate quotes. While they are informative and worth consideration, they should be taken with a grain of salt when it comes to finding the best private student loans for you.