Alternative (private) Loans
These are educational loans offered from private vendors as an alternative (or in addition) to federal loans. These loans are competitive, and it pays to shop for terms, conditions, features and processes. We recommend that you compare interest rates and their components, fees, interest capitalization, repayment terms, credit criteria, and how easy the loan process is.
In researching interest rates, you may want to consider to what base index the interest rate is tied. The most prevalent indices are the prime rate, LIBOR, and 91-day Treasury Bill. In general, the prime rate is historically higher, LIBOR is most consistent, and 91-day Treasury Bill tends to be lowest. Determine the lender's spread or margin over the index, whether it will remain constant over the life of the loan, and the bottom line on the rate you'll be paying. Is interest capitalized annually or once at repayment? What interest rate will the capitalization be based on? Can interest-only payments be made while you are in school?
Fee structures can vary. Up front (origination) fees can range from 0% to 16%. Sometimes, fees from 0% to 6.5% are charged when a loan goes into repayment. Are the fees capitalized onto the principal before entering repayment? Is interest capitalized before repayment fees are calculated?
What about repayment terms? Are there multiple repayment options? For example, are tiered payments possible? Or, if you have Stafford loans, is it possible to have the alternative loan serviced with them? Are there any prepayment penalties? How flexible is the length of the repayment?
Alternative loan lenders have established credit criteria. A lender will use the information in your credit report to determine your willingness and ability to repay. Generally speaking, the easier it is to qualify, the more you're going to pay in fees and interest. If it sounds too good to be true, it probably is! Usually, a lack of credit doesn't necessarily mean "bad" credit. However, better interest rates and lower fees can be had with a credit-worthy co-signer. Keep in mind that it is possible to request a lender to take a "second look" at your credit record by submitting additional information. Request a copy of your credit record and review its accuracy before you apply.
Features of the loan process itself may affect your decision. Is the application easy to complete? How long will the credit decision take? Are credit exceptions ever considered? How long will it be before the loan is disbursed? Can the funds be transmitted electronically, or will a paper check have to be mailed? Can a paper check be expedited? Is the lender difficult to work with? Can you talk to a real person?