All About Private Loans
There are things you need to know about private loans before applying for one.
Money is a tough issue for any college student. Whether you are a senior in high school, a senior in undergraduate school, or someone who is about to enter graduate school, you will probably need financial assistance.
Loans are a great way of paying for college now and catching a break to get a job and pay them off later. It is like someone telling you, “I am lending you this money because I know you can pay me back later.” Isn’t it a nice feeling when someone believes in you?
However, be sure to look over the “Terms and Conditions” for every option. Different lenders will have different interest rates, payback timelines, and requirements to be eligible for a private loan. It is like the same someone telling you, “I’m not putting all of my eggs in one basket, so here is how it’s going down …”
The main difference between federal loans and private loans is:
•Federal student loans are funded by the federal government.
•Private student loans are made by a lender such as a bank, credit union, state agency, or a school.
Now that you know where each loan comes from, here are some other ways these two types of loans differ:
Federal Loans …
•Can help you lower your payments if you are having trouble paying back
•Offer loan forgiveness programs
•Do not require your credit history
•Do not require you to start paying back until after you graduate
Private Loans …
•May not have deferment options to help you pay back
•Do not offer loan forgiveness programs
•Are more expensive
•Have higher interest rates
Click here for more information on both types of loans. Continue reading for more information about private loans.
Check Your Options
Before you start applying for a private loan, revisit your options with federal loans, savings, and scholarships. Financial advisors will always encourage you to max out your federal financial assistance before pursuing a private loan.
This kind of loan should really be your last option when borrowing money. This is not to discourage you from searching for further financial assistance from the private sector. Just be aware that private loans are not the usual first safety line.
They’re More Expensive
The main reason you should consider private loans after all other options are exhausted is because of higher interest rates.
Interest rates on private loans tend to be higher due to the high risk of repayment and higher amounts of money offered among other factors.
You Need Credit History
Do you have a good credit score? Do you even have credit history? Federal loans do not run credit checks so you can go ahead and apply for one now.
Depending on who you go to, some private lenders will require you to provide your credit history. This is to determine how much the bank is willing to lend you. If you have good credit standing, you have a better chance of being offered a larger loan because of your record ability to pay on time.
If you aren’t sure about your credit score or it isn’t in good standing, you will be asked to have a cosigner. Cosigners pledge to take on the loan payments should you default on a payment or need help. A college student’s cosigner is usually a parent or guardian, but anyone with good credit can cosign a loan with you.
Do Not Over-Borrow
Many students have the misconception that they should borrow all the money that is available to them. In order to avoid unnecessary debt and financial stress, learn what your budget is before speaking with a private lender.
1. Consider the total cost (tuition, room and board, and additional fees) of a semester of your preferred college.
2. Deduct how much federal aid will cover of the total amount.
3. Allocate any other money you have (scholarships and grants) that can help you bring the leftover amount down.
4. If you have a job, it would be wise to incorporate how much you will earn into your budget.
Be smart and only borrow whatever amount is left. If you choose to increase your loan amount, you should save it for emergency purposes.
Sallie Mae’s College Planning Calculator can help you figure out how much you should save and borrow. Here are some perks of using this tool, according to the web page:
•You can see the full cost of college, not just tuition.
•Factor savings, scholarships, grants, and loans into your plan.
•If college is just around the corner, they can help you figure out how to pay for it.
•If college is far away, they can help you save for it.
•See guidelines for a loan payment compared to the salary needed to support it.
•Save your plan and you can review, revise, and update it at any time while you put that plan into action.
If you need further assistance on calculating and planning ahead, visit the financial aid office at your school or talk to your parents about your options. Paying for college does not have to be expensive if you do a bit of research and consider different choices.
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