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Taking out a private student loan can help you fill the gap between the cost of college and the amount of financial aid you receive. But before you borrow, it’s important to understand how private loans work and compare your options to make sure you’re getting the best deal.
Here’s what you need to know about taking out a private student loan:
How do private student loans work?
Private student loans are made by banks, credit unions, and other lending institutions. They can be used to pay for tuition, room and board, books, and other education-related expenses.
Unlike federal student loans, which are available to everyone regardless of credit history or income, private student loans are based on your creditworthiness. That means if you have a low credit score or no credit history at all, you may not be able to qualify for a loan or you may have to pay a higher interest rate.
It’s important to compare different lenders before you apply for a loan so you can find the best rates and terms possible. You can use a tool like Credible to compare multiple loan offers at once.
What are the interest rates on private student loans?
Interest rates on private student loans vary depending on the lender and your credit score. If you have good credit, you may be able to qualify for a low-interest loan. But if your credit is poor, you could end up paying a much higher interest rate.
Credible allows you to compare multiple loan offers from different lenders so you can choose the one with the lowest interest rate. And if you have a cosigner with good credit, that could help you qualify for an even lower interest rate.
What is a Private Student Loan?
A private student loan is a nonfederal loan made by a private lender, such as a bank or credit union. The terms and conditions of private student loans are set by the lender, not the federal government. If you have questions about a private student loan offered to you, contact your lender.
Federal student loans offer many benefits compared with other types of loans. For example, federal student loans:
– Usually have lower interest rates.
– Usually have more flexible repayment terms.
– Offeroptions for postponing or reducing your payments if you can’t afford them.
– May be eligible for forgiveness if you work in certain public service jobs.
– Are not based on your credit history.
Before taking out a private student loan, consider federal student loans as your first option. You can apply for federal student loans at StudentAid.gov/loans.
Who Can Apply for a Private Student Loan?
Most private student loans require the borrower to have a good credit history, but there are some loans available for students with no credit history or bad credit. However, these loans will likely have a higher interest rate. You can check your credit score for free on Credit Karma.
In addition to having good credit, most private student loan lenders will also require that you have a steady income and a cosigner. A cosigner is someone who agrees to take on the financial responsibility of the loan if you can’t make the payments. If you have good credit and a cosigner with good credit, you’ll likely qualify for a lower interest rate.
If you don’t have good credit or can’t find a cosigner, you might still qualify for a private student loan if you have a strong employment history or earn a high income. Some lenders also offer loans specifically for graduate students and professionals.
How to Apply for a Private Student Loan
Most private student loans are credit-based, meaning your credit score (and sometimes your income) will be used to determine your loan terms. You may be able to get a lower interest rate if you or a co-signer has good credit.
The first step is to fill out a Free Application for Federal Student Aid (FAFSA®) form to apply for federal student aid. Even if you think you won’t qualify for federal aid, it’s important to fill out the FAFSA form because some schools use it to award merit-based scholarships and other types of financial aid.
You can find private student loans through banks, credit unions, and online lenders. Compare loan features and calculate estimated monthly payments to find the best fit for you.
To apply for a private student loan:
1. Research your options by visiting lender websites or using a loan comparison tool. Be sure to compare APRs, fees, repayment terms, and borrower benefits before choosing a loan.
2. Get organized by gathering the documents you’ll need, which may include your tax return, pay stubs, bank statements, and Social Security Number.
3. Start the application process online or over the phone. Some lenders may require that you apply with a co-signer; if so, they will also need to complete an application and provide their documentation.
4. Receive conditional approval based on a preliminary review of your information. The lender will do a hard credit inquiry at this point, which may affect your credit score. If approved, you’ll receive a loan estimate detailing the interest rate, monthly payment amount, and other important loan terms.
Types of Private Student Loans
There are two types of private student loans: Project Finance and Contract Finance.
Project Finance Loans: In this type of loan, the money is given to the borrower in lump sum and then the borrower repays it in monthly installments. The interest rate on such loans is generally fixed. This type of loan is ideal for students who need money for a specific project like studying abroad or doing an internship.
Contract Finance Loans: In this type of loan, the lender provides the borrower with a line of credit. The borrower can withdraw money from this line of credit as and when needed and only pays interest on the amount that was borrowed. The interest rate on such loans is generally variable. This type of loan is ideal for students who need money for general expenses like tuition, room and board, books, etc.
Repaying Your Private Student Loan
In most cases, you will have a grace period after graduation before you are required to start making payments on your private student loan. Check with your lender to find out the details of your repayment plan. You may be able to choose from a variety of repayment options, including:
-Deferred repayment, which allows you to delay making payments until after you graduate
-Interest-only repayment, which requires you to make monthly interest payments while in school
-Flat-rate repayment, which requires you to make fixed monthly payments while in school