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If you choose to consolidate your student debts with a private loan you have two options – a fixed or variable interest rate loan. It's currently possible to get a variable interest rate as low as 2%. However, this can change every year and could eventually go as high as 8% or even 10%. The interest rate on fixed-rate loans are generally higher than variable-rate loans but the interest rate is guaranteed to not increase over the course of the loan. If you want to quickly pay off a small amount of debt then a variable rate loan might make the most sense. On the other hand, if you feel you will need five or more years to pay off the loan than a fixed interest rate will provide more security.
3. Options for deferment
One of the biggest benefits of a federal student loan is that if you run into a financial hardship, such as losing your job, you could defer your payments. You would likely lose that benefit if you refinance through a private lender as very few of them offer this option. Before you sign up for a private loan, make sure you understand the company's policies regarding financial hardships so that you would be prepared to weather a worst-case scenario.
4. Prepayment penalties
If you get a loan from a private lender you could be hit with a prepayment penalty, which means you would owe a fee if you decide to pay off your new loan early. There are cases where this may be a small fee but with other companies you might find the penalty to be very prohibitive. Check to see if there is a prepayment penalty before signing up for a loan. If you find there is one, you might want to check out another lender.
Where to get a private student loan
If you wouldn’t qualify for a federal Direct Consolidation Loan or just feel that a private loan would be your best bet, you have some new options. Until recently about the only places you could get private consolidation loans were banks. However, there is now a thing called peer-to-peer lending. For example, the website SoFi is a social lending and peer-to-peer site that specializes in student loan refi’s. It can offer better interest rates and terms because it eliminates the traditional middle man. Instead, the money being loaned comes directly from other individuals. SoFi is a membership site and as such it offers benefits such as career coaching and unemployment protection.
Other online peer-to-peer lenders where you might be able to get a consolidation loan at a good interest rate include Upstart, Peerform, Lending Club and Funding Circle. However, be aware that with some of these lenders you will need to have a pretty good credit score in order to get a loan.
If you're not familiar with peer-to-peer lending, here's a short video that explains it in a light-hearted way.