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Looking at Private Student Loans

Key points

  • Any student loan that doesn’t derive from a government funding program is considered private.
  • They are often used to consolidate debt, top-up funds or even to pay off other loans.
  • They are typically faster and easier to apply for, with instant decisions though it pays to compare options.

A private student loan is that which is not provided as part of any government-funded program. These loans are available from traditional banks and other lending institutions and are intended to be used for funding further education.

Although you normally have to be enrolled at a university or other learning facility to take advantage of student loans, there are some options available that will enable you to borrow extra funds after you’ve graduated.

Before applying for any private loans, it’s essential to learn how they work and what the advantages and disadvantages are when using them. Below is some information in this regard.

In most cases, it’s recommended that you look at federal loan options before turning to any type of private student loans. Government loans normally have unique advantages that won’t be available where private loans are concerned. Although it’s largely and give and take scenario with government loans, students will normally fare far better when using them instead of resorting to private loans.

Regardless of whether you obtain government or private loans, it’s strongly recommended that you borrow only as much as is needed to cover the cost of your studies. While most student loans are quite easy to obtain – especially where government loans are concerned – it must be noted that they will have to be fully repaid at some point. This can prove to be more challenging than you realise, especially until such time as you are earning a decent income.

Pros of Private Student Loans

Although applicants choose different types of student loans for various reasons, two of the main factors that are taken into account include:

  • Amount of funds that are available to applicants
  • Whether applicants qualify for a specific type of loan or not

Government-funded loans are usually easy to obtain because in most cases, no proof of income or information regarding credit history is requested at the time of application. Provided that you’re engaged in further studies, the government will willing to provide the funds you need to cover the cost of your chosen courses.

When applying for private student loans though, a good credit history will be required. In cases where your credit history has not been established yet or you have a poor credit rating, you stand very little chance of being able to qualify for private student loans. In some cases, you may be able to obtain them if you can secure a guarantor or co-signer though.

Although it’s fairly easy to qualify for government student loans, you may not always be able to borrow enough from this source to cover the cost of your studies in full – especially if you intend borrowing enough to cover the cost of books, tuition and accommodation by means of loans.

If you intend studying at a private college or university, many government loans will not be sufficient to cover the cost of this either – you may have to resort to applying for private loans that will help cover the shortfall.

Other Aspects to Consider

Some other differences exist between government and private student loans. Most times, interest rates will be lower on government-funded loans and repayment terms are also a bit more flexible where repayment terms are concerned. Interest rates on private student loans can often vary, meaning that it can be difficult to predict exactly what your repayment instalments will need to be.

Consolidating and refinancing will also differ, depending on whether you’re repaying government or private student loans. Many private student loans can be fully refinanced if required, whereas government loans have the ability to be consolidated if necessary.

There are situations where you may only be able to obtain enough finance through private student loans – especially where more in-depth courses are concerned. A stipulation of qualifying for government student loans is that you will normally have to be enrolled at least half time in some study programs – for instance, those that will provide official degrees or certifications. In some cases, government loans may also not be available for a specific study course either.

It’s also possible that you’ll require funds immediately after graduating, and although you may not consider this to be a student loan as such, this form of finance can go a long way in helping you to get on your feet until you find suitable employment. An example would be if you still have to complete licensing, complete an internship or pass an additional exam that will enable you to start working. Some institutions that offer private student loans will be willing to assist in cases like these.

Less Paperwork with Private Student Loans

When comparing government loans to private student loans, you’ll usually notice that a fair bit less paperwork will be required with private options.

Government loan applications will often required providing information regarding your personal financial situation, proof of income and employment for whoever will be co-signing the loan agreement. As such, many families aren’t willing to go this route to obtain study finances.

Many private lenders are even willing to provide funds without you having to provide a lot of personal and financial information, and there will usually also be far less paperwork to deal with when applying for them.

It’s also important to remember private lenders will be somewhat stricter with regards to proving that you will able to repay a loan if they provide it. If you’re working with a co-signer, they will also need to meet the predetermined stipulations. Many government loans are also provided with a range of benefits that would not normally be available if you had obtained funding from a private lender – as such, it may sometimes be worth the extra hassle of filling in additional paperwork.

As with any type of legal contract or agreement, it’s essential that you read and fully understand each of the terms and conditions on loan applications that you complete – regardless of whether they are being funded by the government or any type of private lender.

Representative Example

Representative example of the total cost of the loan, including all applicable fees – Typical loan size of £25,000 over 120 months = £275.82 pm, 4.35% Variable APR – 6% (including £1800 in interest) total repayable £33,098Maximum Annual Percentage Rate (APR) – approx. 24% (lender starting rate 18%) – Typical Apr will be around 8%

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Warning: Late repayments can cause you serious money problems. For help, go to moneyadviceservice.org.uk