Private loans are loans issued through an independent lending institution instead of the federal government. These loans are not part of a federal loan program and usually have higher interest rates than comparable federal loans. Students and parents should research all options, including scholarships, grants, work-study, and federal loans, before seeking a private loan. If you decide you'll need a private loan, be sure to review all of the options and terms to select the loan that best suits your needs. With any loan and especially private loans, remember to borrow only what you need.
Things to Look For
- Interest rate and Annual Percentage Rate (APR): the APR is the annual cost of your loan, including the effect of any fees charged in addition to the interest rate. The APR differs based on the term and loan amount. The APR may be a variable rate and can increase after consummation of the loan. Use extreme caution when considering adjustable-rate loans since you could find your payments suddenly well above your ability to pay.
- Repayment incentives: does the loan reward borrowers who make payments on time? Does the loan offer incentives for automatic payments? You might get a better interest rate or things like late payment forgiveness for being a good borrower.
- Loan limits: does the loan have an annual or aggregate limit? Can you afford to make the payments if you reach the loan limit? It’s a good idea to stay with the same lender each year, so make sure the loan can cover all of your costs throughout your education.
- Repayment period (term): the lengths of repayment periods vary. If your cost of education requires you to borrow larger amounts you may need to have a longer repayment period.
- Pre-approval: does the lender offer credit pre-approval over the internet or phone? It can save you time and give you a more accurate picture of your borrowing limits and interest rate. Pre-approval doesn't usually affect your credit score, but you should still be careful to only seek pre-approval from companies you're interested in.
- Co-signer requirement: does the loan require you to have a co-signer? You might need one if you have limited or poor credit history, or if the loan amount exceeds a certain threshold. If you can’t find a willing and qualified co-signer you will need to find a different loan that you can borrow on your own. Sometimes having a co-signer with strong credit will reduce a loan's fees or interest rate.
- Co-signer release: does the loan offer a co-signer release after you have made a certain number of on-time payments or paid down a certain amount of principal? Being able to remove a co-signer reduces their risk and can help you build your independent credit history.
- Interest capitalization: if you choose not to pay the interest on your loan while you are in school the interest may be capitalized and added to your loan balance. If the interest is capitalized, is it capitalized annually or at repayment? Interest capitalized annually is more expensive than if it is capitalized only once at repayment.
- Repayment: does repayment begin immediately or after you graduate or otherwise leave school? If you can’t afford to make payments while you are in school be sure to get a loan that does not require payment until you are out of school. If your payments begin after you leave school, any payments you can afford to make while in school will help to reduce your overall loan balance and therefore the total amount you'll have to pay on your loan.
How's Your Credit History?
Lenders use credit history to make decisions on which applicants are likely to repay their loans as agreed and on-time. Your credit history is distilled into a credit score using a formula that considers things like number and types of accounts, late payment history, debt-to-credit ratio, and the age of your accounts. The way you handled credit in the past is often a good indication of how you will manage credit in the future. Therefore, your credit score is a snapshot of your level of credit risk. When your credit information changes, so does your credit score. Pay your bills on time, pay down any outstanding debt, and avoid taking on new debt or applying for too many new credit cards.
Your credit score affects everything from your insurance rates to your mobile phone bill to your home loan interest rate. Keeping a good score means maintaining a strong and accurate credit history. You can view your credit report, which is a listing of your credit history, for free once per year from each of the three credit bureaus. You should do this to make sure your information is accurate, including free of mistakes and with no fraudulent activity. Head to the Annual Credit Report website to request your free credit reports. Note that your report is not your score, and scores are not included in the free reports.
Finding Private Loans
If you do need a private loan there are two main ways to research your options.
- Talk with your or your parents' bank, credit union, or other financial services company. They might offer competitive loans directly or be able to recommend a suitable and reputable lender. Some institutions have special offers and discounts for existing customers.
- Search online. Many banks and organizations offer private loans and can be researched online. Try looking for "private education loans" to get started. Start with names you know and trust. Genuine loans shouldn't require application or qualification fees, so be wary of sites or companies that want to charge you to help you get a loan. And remember, if it sounds too good to be true, it probably is.