Private Student Loans - Understanding Interest Rates
The interest rate on a loan can be fixed – a rate that stays the same over the life of the loan – or variable – a rate that fluctuates over the life of the loan.
Fixed Interest Rates
Fixed interest rate loans are loans in which the interest rate charged on the loan will remain the same for that loan’s entire term, no matter what market interest rates do. Attributes of fixed rate loans include:
- Payments will be the same every month allowing for a very accurate way to manage your budget.
- If interest rates go up, your fixed rate will remain the same, providing protection in a higher interest rate environment.
Variable Interest Rates
Variable interest rate loans are loans in which the interest rate charged on the outstanding balance of the loan will change periodically. Variable interest rates can change annually, quarterly or even monthly. Attributes of variable rate loans include:
- Payments may not be the same every month, making it difficult to manage your budget.
- Your interest rate may be lower or higher depending on market conditions.
Private loans typically have a variable rate, though this is not always the case.
The Interest Rate on Your Loan
The interest rate on the loan you ultimately get incorporates an index plus margin. The index is typically the current LIBOR or Prime lending rate. The margin is the number of percentage points added to the index by each lender.
Together they determine the interest rate you will be charged on your loan – the percentage points added to LIBOR or Prime - and, ultimately, the total cost of the loan.