Confused, which of these two would be the best private student loan to choose?
November 3, 2010 by admin
Filed under Student loans
They are both variable rates so iam not really sure which one to choose. Here’s what they’ve offered me:
Option #1
DISCOVER:
prime: +1. 50
APR: 6. 5%
monthly payments if apr stays the same: $90. 85
payments 10-15yrs
2% graduation rewards
Option #2
Wachovia:
prime: . 5% to +4%
apr: 7. 75%
25 years to repay
if i choose auto debit a . 50% discount on apr
To me DISCOVER sounds like a better deal but i could be wrong, since it is variable rates i don’t really know how that works, or how much it can go up or down? HELP PLEASE! I’ve never taken out a private loan in my LIFE. And i also have to so please do not advice me not too.
Im taking out my Stafford loans with Wachovia so that is why i may be leaned onto choosing option #2
iam only taking out what i need. . . i need to pay for rent so i took out $8000 for rent and living purposes which leaves me with $1000 to live and the rest for rent.
my findaid only covered my tuition and it is a private college. Iam VERY aware that this is not the right way to go . . . but what else is there>? i have to support myself with no aid from parents because they don’t have the $$ to give for such a costy education.
I also plan to get a job in the city iam moving too, so the private loan (I HOPE) will only be for the year 08-09
Go with option #1. The shorter you are to pay the more you save.
Ever heard of the Sub prime mortgage crisis? This is a result of folks taking out variable interest rate loans because they didn’t know any better.
In 4 or 5 years, there WILL be a student loan crisis. . . . . from folks who took out variable rate loans because they didn’t know any better.
i would do option #2. . . credit card debt you get with discover can be a slippery slope and it would be easier repaying if you have all of your loans with the same institution. . . . look to get a cosigner with a good score to lower your rate
looks like option number one is much better.
you’ll end up paying whole lots more if choose the second one. but it is only my opinion.
First of all, you don’t have anywhere near enough information to make this decision, and that’s easy to tell just from looking at the rates you’re quoting.
You seem to know that your Discover rate will be “Prime plus 1. 5%”, but your Wachovia rate is “Prime plus some number to be determined later that could be as high as 4%” Obviously, if that number turns out to be more than 1. 5%, then the Discover loan is cheaper, even more so because you’re looking at a much longer repayment term on the Wachovia loan.
When I see students discussing loan options, there is often some bizarre sort of favoritism of “lower monthly payments” – as in “Shouldn’t I take this loan, because that way my payments will be a lot less?” That statement is a cause for real concern, because it really demonstrates that people are taking out huge loans without any understanding of how lending works.
First of all – let’s look at an interesting number. The prime rate in this country right now is 5. 0%.
Don’t fall in love with that number.
The prime rate has had a wild ride over the last 30 years:
One year ago today it was 8. 25%
In 2000, it was 9. 50%
In 1989, it was 11. 50%
In 1980, it was 21. 50%
You’ll say, yeah, well, it’s only 5. 0% now – but keep in mind that you’re going to paying off this loan somewhere between 15 and 30 years from now. There’s a pretty darned good chance that prime is going to go for a major ride sometime in the next 15 to 30 years. Would you want to be paying 1980 interest rates on your “Prime plus 1. 5% loan”?
Now, how about some more numbers:
Let’s say that you borrow $25,000 on each of these loans – and for the sake of argument, let’s say that the Wachovia interest rate turns out to be exactly the same as the rate you’re being offered by Discover, “Prime plus 1. 5″. Let’s also assume that the prime rate goes up, just a little bit, and averages 7. 0% during your repayment period. What’s your payment?
Discover:
Monthly payment: $246. 18
Number of payments: 181
Total amount repaid: $44,314. 18
Total interest paid: $19,314. 18
Wachovia
Monthly payment: $201. 31 (a savings (!!) of $45 a month)
Number of payments: 300
Total amount repaid: $60,389. 67
Total interest paid: $35,389. 67
I know you’re talking about a loan (you didn’t indicate how much you need) that would have payments in the $91 range, so my example seems a little high. Is this the only money you’re going to need for college, or is this one year’s loan, and you’ll have to go back and take another similar loan for next year? If so, you’ll easily wind up with $25,000 or more in debt.
Second of all – the auto debit and the exact amount of the loan won’t change the comparison between the two. The Wachovia loan, because it’s paid out over a much longer repayment term, is going to be considerably more expensive – and that’s if you qualify for prime plus 1. 5, your rate could actually be much higher.
But take a look at both of those numbers – with a fairly conservative estimate of where the federal prime rate will go over the next 15-30 years, the MINIMUM interest that you’ll pay on this loan is almost as much as you’re borrowing. If you went with the Wachovia option, you might pay back three times as much as you borrowed.
That’s scary.
And the lesson is – NEVER borrow more than you absolutely must.
It’s good that you’re asking this question, but the answer is really obvious. Try not to borrow. If you must borrow, go with the Discover loan. If you go with the Discover loan, borrow as LITTLE as you possibly can.
Good luck!