Private student loans are used to pay for qualified educational expenses. Private student loans can be obtained through credit unions, banks, online lenders, credit unions, or colleges. These loans have higher borrowing limits than federal student loan and can offer lower interest rates to borrowers with good credit. However, they provide fewer borrower protections.
You will need to meet the lender’s eligibility requirements and pass a credit check in order to qualify. The interest rates for applicants with excellent or good credit are lower. Because undergraduates don’t usually have a long credit history, they will need a cosigner to get a private student loan.
What are the uses of private student loans?
Although the lender’s restrictions may vary, you can generally get private student loans for:
- Board and room
- Books and supplies
- Care for children
- You can’t usually use student loans for:
- Restaurant dining.
- Business expenses.
- Purchases of a car or a home.
- How do I get a private student loan
Although every lender will have its own application process for student loans, there are some steps that you can follow to obtain a private loan.
Your credit score is important. You may find that some lenders list credit requirements on their websites. However, even if they don’t, it’s safe to assume you’ll need a credit score of the mid-600s in order to be eligible for a student loan.
If you need a cosigner, get one. A co-signer is needed if you don’t have a lot of credit history or your credit score is low. To help you get approved, this person is usually a family member or parent.
Get prequalified. Rates advertised by lenders may not be the rates you will receive. You can get prequalified with several lenders to compare real offers and determine which loan is right for you.
Send an application. After you have chosen a lender you will need to send your complete application. This will include details such as your Social Security number, financial history, and school information. This stage will also include a credit check.
Wait for verification. Once your application has been processed, the lender will confirm your attendance costs with your school. The lender will usually disburse funds to your school within a few weeks.
What are the student loan interest rates?
Private student loans typically offer two types interest rates: fixed and variable. Fixed interest rates don’t change over the term of the loan. This option is good for those who want predictable payments but the rates are usually a bit higher. Variable rates are tied to changes in an index such as the Libor. While these rates can fluctuate over the course, lenders limit the maximum rate that they will allow.
Your monthly payments will include both the principal (the amount borrowed as a base) and interest charges. Your monthly payment will remain the same regardless of whether you have a fixed rate. However, each month will see a decrease in the amount that goes toward principal and a rise in interest rates. To determine the impact of different interest rates on your monthly payments, you can use a calculator for student loans.
There are many types of private student loans
Private student loans are available to almost any student, including undergraduates and students pursuing business, law, or medical degrees. Private student loans are also available from some lenders for international students, people studying abroad, in community colleges, or who are enrolled in a school that trains professionals or is studying for the bar exam. Even though student loans for those with poor credit may be more costly, there are student loans available for those with less credit.
Private student loans: pros and cons
Consider the pros and cons of private student loans before you apply for one.
High borrowing limits: Private loans have higher borrowing limits that federal loans. Some loans can even cover the entire cost of enrollment.
Low interest rates: Borrowers who have good credit may be eligible for the lowest interest rates.
Flexible enrollment requirements: Federal student loans require that you are enrolled at least half-time to be eligible. However, private lenders may offer loans to borrowers who only take a few classes or go to summer school.
Choose from fixed or variable rates: You have the option to customize your repayments by selecting either a fixed rate or a variable rate.
There are no federal benefits or protections: Federal student loans offer benefits such as standardized forbearance and COVID-19 relief, income-driven repayment plans, and income-driven repayment plans. These options are less available for private lenders.
Average credit required: Federal student loans do not require credit checks. However, private student loans will require credit scores in the 600s or higher.
Poor credit borrowers are subject to high rates: Private student loans with higher interest rates will have higher rates if your credit score is lower. Your interest rate may be double-digits if your credit score is close to the minimum lender requirement.