How to Approach Student Loan Teaser Rates You Get in the Mail
- Author: Bryan Miller
- Posted: 2024-05-16
If you are currently paying back your student loans, your mailbox likely gets inundated with solicitations that offer you an unheard of interest rates on your student loans. These are what is known as teaser rates. The question for you is whether it makes sense to use these teaser rates to refinance your student loans. So long as you read the fine print, it could be an opportunity for you. However, you may be best off trying to lock in a low rate for the long term right now.
If you were to Google "student loans" right now, you would see numerous hits that promise you "rates as low as 1.24%." You are likely questioning how a lender can get away with offering you rates that low for a long-term loan. The answer is that they cannot. You may get that very low rate for a year or two at the beginning of the loan, but the rate will soon go up in the future. This is pretty much the same concept as a balance transfer credit card where you get a zero interest rate in the beginning, only to see it go up after the introductory period.
These Rates Could Save You Money
This does not mean that you should not consider a student loan teaser rate. This may fit you well as part of an overall strategy in cutting your payments as low as possible right now during a tough economic time. You would do this for the same reason as why you would want to switch to a balance transfer credit card, meaning that you want to bank the extra money for other purposes. For example, you can use the money that you save on these low student loan teaser rates in order to make a dent in your credit card debt that you owe. Alternatively, you could put the money away in your emergency fund, especially in light of the tough economic times right now.
However, the one student loan teaser trick that you should not fall for is the offer to cut your monthly payments. When a lender tells you that they can reduce your monthly payments, it is the same trick that car dealers use when they offer you a low monthly payment. You may have eight years left on your student loan repayments at $300 per month. Of course, the lender may tell you that they can cut your monthly payment to $250, but you need to look at the fine print. Embedded in your lower monthly payment is a longer term of repayment. In other words, you pay less, but you would need to pay longer. In actuality, this would raise the amount of total money that you would need to pay.
You Need to Consider Your Own Financial Situation First When Deciding if this Is Right for You
Whether you should take advantage of these offers completely depends on your situation. You should not just fall for the headline rate before you go ahead and apply for the loan. First, you should sit down with a calculator and go through all of the fine print. You should do a side-by-side comparison of the possible new loan versus your current loan. If the new loan results in your paying more, it should be the end of the story. Even if you are able to save money, you need to weigh whether it is worth it to close an old loan and start a new one. This could lower your credit score by removing some of your credit history and adding a new account where the lender has done a credit check on you.
The most important thing to do when considering one of these loans with a low teaser rate is your due diligence. The rule of thumb when someone is offering you credit with terms that seem too good to be true is that all is not what it seems. You really need to understand what you are getting into before you sign on the dotted line because you could get locked into a product that costs you more. Oftentimes, the rate that you end up paying after the teaser rate ends is buried in the fine print of the offer. Make sure that you look for that first and have an idea of what this means for you further into the repayment period.
