Private Student Loans 101
Sometimes scholarships, grants, and federal loans just aren’t enough to cover the cost of your education. So if you’re like most students, you got a private loan to fill in the missing piece of the puzzle. These loans are very common and often very necessary, but they are a lot different from federal loans. In this lesson, you’ll find out how and why and what those differences will mean to you when it comes time to repay your loans. First things first, what is a private loan? In simple terms, it’s a loan from a bank or your school that isn’t insured by the federal government. Private loans typically have higher interest rates, less options to postpone payments, and more credit requirements than federal loans. This is why private loans should be your last resort. After scholarships, after grants, and after you’ve gotten all the federal loans available to you. Before we get into more detail, lets talk about two terms we’ll use quite a bit: lender and borrower. Lenders are simply the people who provide the money. The borrower is the person who requests the money, uses the money, and eventually has to pay back the money once school is over. In this case, of course, that’s you. Did you know that when you apply for a private loan you need to have your credit checked? In that way, private loans are a lot like any other major loan such as a car loan or a mortgage. Lenders look at your credit report and credit score to estimate their risk in loaning you money, and that determines not only your approval for a private loan but also your interest rate. So, what exactly are lenders looking for in your credit report? Well, they wanna make sure you first meet the minimum credit score, and second that you have no major credit problems such as bankruptcy or delinquencies. Some lenders will require a cosigner or a co-borrower in order to qualify you for a private loan. In this case, the lender would look at both your credit report and theirs. So if you are not able to pay your loan back, your cosigner would be required to do so. A lot of students use their parents or other relatives as cosigners. The best cosigners are those that have good if not excellent credit as their score and history will play a significant role in the cost of your loan. As in the better their credit, the lower your interest rate might be. And the lower your interest rate, the less money you’ll have to pay back in the long run. Okay, so what if your lender has approved you for a loan, but you don’t like the rate? Do you have to take that loan? Nope. You actually have 30 days to accept or reject the terms of your private loan. That’s 30 days from the time your application is approved and you receive disclosure statements. If you think you want to shop around for better rates with other lenders, make sure you do it within 30 days. Otherwise, those extra credit checks could hurt your score. You can also cancel a loan without penalty at any time within three business days of the date the loan is completed. In the next lesson, we’ll take a closer look at interest rates along with repayment terms and fees.