Understanding private loans

When education expenses are higher than a student's scholarships and/or government loans, the student has to look for other sources to make the payment. If the student or family has savings for college, the choice may be to use the savings assuming the savings are not needed for other purposes and the savings will be enough to pay the education expenses. If you don’t have access to savings or don’t want to dip into your savings, a private loan is an alternative to consider funding the education. Don’t forget to also try searching for scholarships or grants when you see a need for a private loan. If you need the money fast, however, a private loan may be an appropriate option to consider.

A private loan (also known as an alternative loan) is made by a bank or other financial services company. Because a private loan is based on borrower’s past credit history, a better credit history will increase the chances of approval and favorable interest rates. Conversely, a bad credit history will likely result in a denial or expensive interest rate charges.

If the student’s school certifies the private loan (i.e., verifying that the student is attending the school and does need the money for academic purposes), the borrower has chances of getting lower interest rates and fees. Without such school certification the lender may associate risk of fraud or default and accordingly charge more interest rates and fees. In any case, interest on such private educational loans is tax deductible. Check with your tax advisor for specifics on your tax deduction eligibilities.

Your objective, when considering a private loan, is not just to get a loan but also to make sure the loan is not unnecessarily expensive. Make sure the loan you choose is right for your financial situation. Remember these simple but important points in mind when evaluating terms of a loan:

• If you intend to pay the loan quickly, consider paying low fees but high interest rate
• If you intend to pay the loan over the maximum repayment time allowed, pay higher fees but low interest

Regardless of how you want to spread the repayment over time, work with your numbers to determine the best loan option that is right for you.

Applying for an educational private loan

Typically, students just starting college do not have sufficient credit history to qualify on their own for a private loan. Their credit history is not deemed sufficient because they do not have long-term job and history of regular payments such as to credit cards or mortgage companies. When a student has inadequate credit history, the student will need a co-borrower (such as parent or spouse) with better credit history. Observe below the typical terms of a loan associated with credit history:

Bottom line is that the loan is expensive for a borrower (and co-borrower) with inferior credit history than with that of a borrower (and co-borrower) with better history. Check with your lender to determine the eligibility requirements for obtaining a private loan with better borrowing terms.

How do you go about choosing a lender? Start with your school. Your school may have a list of preferred private lenders. Do not forget to use the web to find more lending choices. Remember the terms of the loans will vary according to the lender. Therefore, choose a lender carefully and pay attention to the terms. Ask these questions, in addition to any other questions you may have, to evaluate your private loan options:

• What is the interest rate?
• What and how much are the fees associated with your loan? Any origination or guarantee fees?
• Any discounts or rebates when you pay on-time (when you start paying back)?
• When does the repayment start (immediately or deferred while you are in school)? Are the interest rate and/or fees higher if the payments deferred?
• Are there any prepayment penalties?
• Will you have easy access (i.e., online) to your loan account and the customer service? How do you like the customer service of your lender?
• Does the loan have a co-borrower release option (this frees the co-borrower from the loan responsibility and makes the student solely responsible for the loan)?