Loans based on LIBOR or Prime Rate?

[RobDMB]

I've noticed some banks base their student loans on the Prime Rat and others such as accessgroup base theirs on the Libor rate plus a percentage. I was wondering what the advantages or disadvantges are to either option. Thanks

[taxlaw08]

Historically, LIBOR rate has been lower than the Prime.  Check out the following link:

http://accessgroup.org/students/LIBORforstudents.htm

[rm5400]

Historically, LIBOR rate has been lower than the Prime.  Check out the following link:

http://accessgroup.org/students/LIBORforstudents.htm

that's true but irrelevant I think.  all the loans add some % to the prime or libor rate so even though the LIBOR is lower it will have more added on top of it.

It does seem that most schools recommend Access or Northstar/T.H.E.   This is probably because they are non profits and in fact THE redistributes their profits by way of interest rate deductions.  This fact made their rate the best deal for me and hence my choice.

I haven't thought this out too much but, it seems if you have a constant and a variable rate and rates are undoubtably the lowest they will be for decades to come, then you are better off going with the rate whose total includes less variation.  In other words if the effective rate at both place were say 7.0%; 3.4% LIBOR + 3.6%  vs. a 6.0 Prime rate + 1.0%.  If the rates were to go up by the same percentage (of themselves)  you would be better off with LIBOR because only half of your effective interest rate went up instead of about 85% of the effective rate with the prime loan.

Please someone let me know if that logic is incorrect.

[Hegel]

I remember reading somewhere that Prime was better than LIBOR, because LIBOR is more volatile.  However, I saw a graph of the two rates the other day and they seem to correlate almost exactly with each other.

However, the following graph I just found comparing 3-month LIBOR to Prime shows a strong correlation, but the spread between the two rates is growing with the Prime rate moving away from the 3-month LIBOR.  If this trend continues, it would seem that the Prime rate might be the better choice over the longhaul.

http://www.briefing.com/morningstar/mtgdata/prm_lbr.htm

[lawyerboy]

Historically, LIBOR rate has been lower than the Prime.  Check out the following link:

http://accessgroup.org/students/LIBORforstudents.htm

that's true but irrelevant I think.  all the loans add some % to the prime or libor rate so even though the LIBOR is lower it will have more added on top of it.

It does seem that most schools recommend Access or Northstar/T.H.E.   This is probably because they are non profits and in fact THE redistributes their profits by way of interest rate deductions.  This fact made their rate the best deal for me and hence my choice.

I haven't thought this out too much but, it seems if you have a constant and a variable rate and rates are undoubtably the lowest they will be for decades to come, then you are better off going with the rate whose total includes less variation.  In other words if the effective rate at both place were say 7.0%; 3.4% LIBOR + 3.6%  vs. a 6.0 Prime rate + 1.0%.  If the rates were to go up by the same percentage (of themselves)  you would be better off with LIBOR because only half of your effective interest rate went up instead of about 85% of the effective rate with the prime loan.

Please someone let me know if that logic is incorrect.

Not all lenders add a percentage to the Prime. I just got Prime + 0% from Citibank's Law Loan program. Pretty good deal I think.

[rm5400]

Not all lenders add a percentage to the Prime. I just got Prime + 0% from Citibank's Law Loan program. Pretty good deal I think.

That does sound pretty good.  you should check with access group because good credit gets you LIBOR + 2.45%.  Another thing to check is fees and so forth.  Also the other thing I was told by my school was that it makes it a lot easier to have all your loans in one place (ie stafford and private).  so check if that place does staffords too.  Lastly, check about interest rate reductions.  Access group does reductions for direct debit and after 48 months.  THE does the "profit sharing" rebate of roughly 1% as soon as repayment begins. 

Good luck.

[_BP_]

Here is a graph:

http://www.briefing.com/morningstar/mtgdata/prm_lbr.htm

Libor is going to be lower because it is more the equivalent of the US FED Funds rate (rate at which banks borrow from each other), but in the UK.

Prime is akin to the rate that banks will lend at, but to their most creditworthy customers. 

While Prime will track higher, the spread to Libor for an equivalent borrower will be higher so that the effective rate is near the same regardless of what underlying rate you use.

That's why Prime plus zero loans are available, but Libor based loans will always be Libor plus a spread.
HTH

[lyrarain]

tag