For most of the money lenders, a student loan is a low-risk loan in money lending. That is why they prefer this over other types of loans. However, low is the risk for the money lenders, it does not mean it will be the same for you. It is for this reason you will need to be more careful about the security component when you want to take out a student loan.
The need for money to pay for the college fees is perpetual. You will need it every semester, and quite a lot of it. If you do not have enough savings, a solid income or rich parents, making such payments can be really tough, if not impossible. It is during these times you will need a student loan.
Most banks and financial organizations along with online sources such as Libertylending.com and others help thousands of students every year to pay their school and college fees. There are a few that help them by matching them to several:
- Grants
- Scholarships
- Government programs
- Different internships and more for which they actually qualify.
This helps them to find high value scholarships easily and even internships with major companies like Apple, Google, and even NASA!
Basics of borrowing
You will need to get the basics on taking out student loans right first to ensure that you gain the maximum from the money you get. If you are a current college student or going to be one in the future, chances are high that you too will be considering taking out a student loan. However, before you make a decision, make sure that you make an informed one. It will pay you off well if you know and follow the basic principles behind taking out a student loan.
Just like all other loans, a student loan will also consist of three basic components: The rate of interest, security, and term of the loan.
The interest rates
The interest rate is the amount that the lender charges you for using their money. This interest rate is actually a small percentage of the total lent out. There are basically two different types of interest rates in loans: fixed or variable.
- Fixed interest rates are just that. These are unchanging. This means, if you take out a loan at a fixed interest rate of 5% for five years, it will remain 5% for five years irrespective of the changes in the market rate of interest on loans.
- Variable interest rates are also known as adjustable rates. It can change over time being higher or lower than the amount in which you may have taken out the loan initially. The fluctuations on the rates are mainly based on the standard market rate such as the prime interest rate.
The prime interest rate is the lowest rate of interest that a bank can provide to their preferred customers at any given time and place. For example, if you take out a loan carrying a variable rate at prime +2, it means that you will have to pay 2% more than the prime rate irrespective of what it is at that point of time.
However, for specific and popular student loan programs such as Stafford and Perkins Loans, the interest rates are pretty low. Apart from that, the government pays for the interests on these subsidized loans when you are studying in the college.
The security component
All loans are either secured or unsecured. This means you either put up an asset that is often referred to as collateral to get a loan as your collateral acts a as guarantee for your loan repayment.
In case of a secured loan with collateral, you guarantee the lender that the amount will be repaid some way or the other. If you do not or cannot, the lender has the legal right to claim, confiscate and sell the thing you own and pledged as collateral to recover the amount unpaid. This gives the lender a lot more security and therefore allows them to charge a low interest rate on your loan.
Unsecured loans, on the other hand, do not require any sort of collateral from the borrower. That means the lender does not have any protection if you default and the loan goes unpaid. Therefore, all unsecured loans almost always carry a higher rate of interest as compared to the secured loans. It is for this reason the banks and other lending institutions often require an additional person to co-sign for such unsecured loans who has to repay the loan in case the borrower fails to do so.
However, in case of student loans, the significant advantage is that even though you do not have to pledge anything as collateral, you still get a low interest rate on these loans.
The loan terms
Lastly you should know about the terms of the loan. This is actually the length of time given to the borrower to repay the amount borrowed from the creditor.
- As for personal loans the loan term is usually five years but it can be one year as well.
- Student loans on the other hand usually have a repayment period of ten years.
- Home loans have the longest terms often extended up to 15 to 30 years, depending on the conditions.
Typically, you must remember that longer the loan term, the higher will be the interest rate. The higher is the rate of interest and loan term, the more you will pay for the loan in the end.
However, even if the loan term is the maximum length of time a borrower gets to repay the loan, you can always pay it off before the term is up. Just make sure that you inquire about the early payment charges because banks and financial institutions may impose early payment ‘penalties!’
When you deal with your student loans, you can up your monthly payments to shorten the term of the loan and at the same time reduce the total amount paid as interest but make sure that amount you save is much more than the amount you may have to pay as penalties.
In any case, if you find it difficult to pay with your current rates and terms, consider debt consolidation or student loan refinancing.