I know what you’re thinking: as a student, why in the world would I even consider looking for a personal loan when I can apply for a nice federal student loan instead? After all, federal loans have much lower interest rates and are easier to access when you’re in college. But once the dust settles and you’ve exhausted every single scholarship, grant, and federal student loan opportunity available, it might be the case that you still need a little bit more moolah to pay for all of your expenses. This is why many students are now looking into personal loans as a method of covering all their extra costs while in college, such as rent, groceries, and car maintenance, which can rapidly drain a college student’s spending cash and earnings. Students have more personal loan options than ever before thanks to the rapid growth of online personal loan providers. But the question is, which one do you choose?
What to Consider
At first glance, personal student loans aren’t too different from other kinds of loans. Just like private loans, they are offered by credit unions, banks, and other financial entities. They also go directly into the hands of the loanee when their application is confirmed. However, the purpose of private student loans is to take care of tuition fees, while personal student loans can be used for any other college related expenses. For example, a personal student loan may cover the cost of travel, a laptop or computer, textbooks, and other supplies that a federal or private student loan may not be enough for. The borrower is able to spend their loaned money whichever way they like, because the money doesn’t have to go through a university middleman like it would have to with a federal student loan.
Before you start searching for any personal loans, consider that personal loans have stricter requirements than federal or private student loans. If the student applying for a personal loan isn’t creditworthy, they’ll have to find a cosigner who is. The student and their cosigner will then need to sign a legally binding contract where they agree to their financial responsibility for the loan and its accruing interest until it is fully repaid. The lender will also likely want to see proof of the student’s personal income.
Keep in mind that, when approved for a personal loan, interest will start building up from the moment the requested money is transferred into your account. If a student’s cosigner has an outstanding credit score, they might be able to get a lower interest rate on the loan. Having payments automatically withdrawn from their bank account could result in lower fees as well. Lastly, because repayment plans for personal student loans are subject to each individual lender’s policies, students thinking of applying for one should carefully examine the clauses in their loan agreement. Determining factors of a loan’s repayment plan will include the interest rate, the student or cosigner’s credit history, what the loan is being used for, and the total amount borrowed.
What to Look For
When looking through personal loans providers, pay close attention to the loan’s terms of agreement and what they offer. The best personal loans will offer adequate rates and low or no fees, which means you can get the money you need for less overall blowback. To find out what kind of rates a lender will offer you specifically, you can request a rate quote. To this end, a lender can perform two kinds of credit checks: a “soft” credit check, which won’t affect your credit whatsoever, or a “hard” credit check, which could lower your credit score by a few points. Lenders need to do a credit check so they can pre-qualify you and give you a customized loan rate estimate.
Fees are another thing to review when comparing your options for potential lenders. Some examples of these are processing fees, which are paid to cover background checks, employment verification, and any other expenses a lender has while processing your loan; and early repayment fees, which are charged when making a loan payment before it is due each month. The biggest one to watch out for is the infamous origination fee, which is like an application fee that can add anywhere from one to five percent of your total loan costs.
What to Look out For
College students will find that the main issue with personal loans is they can be very expensive. Because students typically have lower credit scores, banks see them as unaccountable. They assume that students will have a higher risk of defaulting on their loan, which gives the banks greater freedom to charge high interest rates. You might end up paying a significantly greater amount for loans that, theoretically, should be inexpensive.
It’s a shame that the high cost of education nowadays means many students will graduate while riddled with debt. In addition to expensive tuition and living costs, students are also expected to handle all these other costs that no one tells them about ahead of time. And even though applying for a personal loan may not be the smartest financial decision, these loans can be vital for those who can't afford to go to school without their help. Personal loans can provide these students with the money they need to make ends meet and cover whatever expenses other loans and financial aid aren't enough for. If your financial options are few or have been exhausted, a personal loan might just be what you need to be able to concentrate on your schoolwork and focus on getting that college degree. Take a look at our list of top personal loan providers to kick off your search.