If you are debating between fixed and variable interest rates on your student loan refinancing application, you might think hybrid rates — a combination of the two — will only complicate the choice.
Hybrid rates, however, could help you score a lower initial interest rate, reduce your monthly payments and/or potentially save you some serious cash.
Here’s what to know about these so-called hybrid loans and how to decide whether they’re in your best interest.
What is a hybrid loan?
Simply put, a hybrid loan carries a blend (or hybrid) of fixed and variable interest rates.
You might be drawn to fixed rates because of their consistency and security. You can be sure that your rate won’t increase during repayment, though you might have to accept a higher initial rate in exchange. This type of loan has cost assurance, letting you know full well the exact price of each monthly payment for the duration.
A variable rate, however, can fluctuate with the market. Currently, interest rates are expected to continue rising over the coming year, so variable-rate loans are likely to come with lower starting rates than for fixed-rate loans. Getting a lower rate now, even though it might increase in the future, could be a good trade-off if you plan to repay your loan before rates have a chance to rise too much.
With so-called hybrid loans, a relatively new phenomenon, lenders typically offer a fixed rate for a portion of your repayment before a variable rate kicks in later. You can find hybrid loans offering lower introductory rates than ones you could secure on a traditional, fixed-rate loan.
Is a hybrid loan right for you?
Hybrid offers some (if not the best) of both worlds.
Like with fixed-rate loans, you secure a relatively lower rate for the beginning of your repayment — when the balance is at its largest — and keep your payment dues consistent. And like with variable-rate loans, you could also save more money if your variable rate doesn’t rise significantly during the remainder of your repayment.
So, yes, that makes hybrid loans appealing if you want to prioritize low monthly payments over higher interest payments down the road. You might think of it as a graduated repayment plan, but for private loan borrowers. As your income (hopefully) rises, so too does your ability to make larger payments on your potentially higher rate.
Hybrid loans could also be appealing if you plan on prepaying your loan — that is, paying it off before the variable rate strikes.
Prepaying is a realistic option for many borrowers. CommonBond, which helped pioneer hybrid rates for student loan refinancing in 2015, said their average customer finishes a 10-year repayment in six and a half years.
Running the numbers with our student loan payment calculator could clarify the usefulness of hybrid loans for your own situation.
Say you’re considering refinancing $50,000 on a 10-year term, tagged with either a 5.05% fixed rate or a 4.50% hybrid rate. If you go the fixed route and prepay by the five-year mark, you’d shell out $6,682 in interest. But if you elect a hybrid rate and repay the loan within 60 months, you’d save almost $800, paying just $5,929 in interest.
Where to find hybrid loans
If you seek either lower monthly payments or a faster, cheaper repayment, you might decide that a hybrid loan is right for you. The question then becomes where to find one.
Top-rated lender CommonBond currently offers a 10-year term for hybrid rates. That’s an initial five years on a fixed rate and five more on a variable rate.
Keep in mind that with CommonBond at least, you could secure a lower fixed or variable rate if you have sterling credit. The lender’s rate range for hybrid loans started at 4.35% with autopay, surpassing the contemporary base rates for fixed (3.67%) and variable (2.47%) loans, as of November 2018.
But that said, a CommonBond hybrid loan could be a cost-saver if you have good but not excellent credit. The lender’s initial rate for hybrid loans topped out at 6.30%, while fixed-rate loans carried a maximum possible rate of 7.07%.
iHelp is another example of a lender that features hybrid rates, although it offers them only on a 20-year repayment term. Your rate would be fixed for the initial five years and then get readjusted every five years until your debt has been repaid.
As of Dec. 3, 2018, iHelp offered initial rates of 3.25% to 6.50% for its hybrid loan. Its rates for traditional fixed-rate loans were higher on both ends of the spectrum.
Before you opt for a hybrid loan
It’s never fun to imagine worst-case scenarios, but it could help you choose between fixed, variable and hybrid rates for student loan refinancing.
Say you lose your source of income and can no longer afford to prepay your hybrid loan. Or perhaps your fixed-turned-variable rate starts climbing in year 6 of your 10-year repayment and you struggle to keep pace with the larger monthly payments.
Before you select an initially lower hybrid (or variable) rate over a fixed rate, think these scenarios through. Even if the rewards of hybrid loans outweigh the risks, you still have to be comfortable with those risks.
Also, it’s best to choose a lender for reasons beyond simply whether it offers hybrid loans. If you are concerned that the second half of a hybrid loan could get the better of you, for example, you might prioritize lenders like iHelp that offer forbearance to pause your repayment in times of financial distress.
Note: Student Loan Hero has independently collected the above information related to CommonBond and iHelp student loan refinancing. The lenders have neither provided nor reviewed the information shared in this article. The rates quoted here were current as of Dec. 3, 2018.
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|2 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with an 8-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7% variable Annual Percentage Rate (“APR”): 96 monthly payments of $179.28 while in the repayment period, for a total amount of payments of $17,211.20. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 5/22/2019. Variable interest rates may increase after consummation.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
3 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
4 Important Disclosures for Discover.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
6 Important Disclosures for LendKey.
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.99% – 11.32%2||Undergraduate, Graduate, and Parents|
|4.50% – 11.35%*,3||Undergraduate and Graduate|
|4.84% – 13.49%4||Undergraduate and Graduate|
|4.25% – 11.30%5||Undergraduate and Graduate|
|4.50% – 9.47%6||Undergraduate and Graduate|
|3.74% – 9.72%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.32%8||Undergraduate, Graduate, and Parents|