There are some factors that can affect your student loan interest rates. Here are some of them:
Type of lending institution
How much interest is going to be charged on your student loan will first and foremost be determined by the type of lending institution you’re borrowing from. If you borrow from the government, the interest rate will be different (and most likely lower) compared to the interest rate charged by a private lender.
Terms of the loan
Interest rates also vary on the duration of the loan. Short-term loans are usually loans that last up to a year. These loans have a lower interest rate compared to long-term loans. Long-term loans bring a greater amount of risk to the lender as future economic conditions are harder to predict, thus, the higher interest rate.
Your credit rating imposes a major bearing on how much your student loan interest rates are going to be. Basically, your credit rating is based on your financial performance, such as if you meet your credit obligations. This history includes the loans you took in the past, your repayment record, your credit card payments, etc. This information is compiled by credit rating agencies from reports submitted to them by lending and credit card companies.
You should be proactive in taking care and tracking your credit rating. Paying your credit card bills on time is a start. And you should make it a point to request a copy of your credit file every year to check for discrepancies even if you are not taking a loan yet.
Inflation is the increase in the prices of goods and services across the general economy that leads to a diminished purchasing power of money. The interest rates on your loan will therefore be determined in part by the projected inflation rate for the duration of your loan. Lenders factor in inflation as a safety net in the event that the purchasing power of their investment declines.
Interest rate options
If you take out a student loan with the government, you have a choice between a fixed interest rate of prime interest rate plus 5% and a floating interest rate of prime interest rate plus 2.5%. Both options have their own advantages and risks. Fixed interest rates do not change regardless of market conditions, while floating interest rates has the potential to change drastically.
Some of these factors are beyond your influence, while some, like your credit rating, is very well within your control. Manage what you can and do research on those that you can’t to get the most out of a loan.