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 federal student loan instead?
After all, federal loans have much lower interest rates and are easier to access when you’re in college (you can check out our section on 10 Best Student Loans here.) 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 cover all of your expenses.
This is why many students are now looking into personal loans as a method of covering all their additional expenses 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 to choose?
WHAT IS A PERSONAL LOAN?
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 costs of
- Travel
- Laptop computer
- Textbooks
- Supplies that a federal or private student loan may not cover
The borrower is able to spend their borrowed money whichever way they see fit because the money doesn’t have to go through a university middleman like it would with a federal student loan.
This can be a tricky situation; if all of a sudden you have spending money in your pocket, you might feel tempted to splurge on non-essentials. But if you practice financial sense and discipline, you will find that the extra cash can go a long way in helping you during your college years.
Before you start searching for any personal loans, consider that these 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 co-signer who is.
The student and their co-signer will then need to sign the loan, agreeing to their financial responsibility for it and its accruing interest until it is fully repaid. It's also likely that the lender will want to see proof of the student’s personal income or other financial documents.
Personal Loan Rates and interest
Keep in mind that, when approved for a personal loan, interest will start accruing from the moment the requested funds are transferred into the borrower's account.
If a student’s co-signer 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 (direct debits) could also result in lower fees.
If you have the means—and if the lender allows it—it may also be beneficial to make more than the minimum repayment amount each month so that a larger portion of the money is applied to the principal (the actual amount borrowed) instead of the interests.
You see, students often find themselves dragging on student debt long after graduating because they make the minimum payment each month, which goes to the interest, yet interest keeps accumulating.
To break free from that, a borrower needs to start paying over the minimum and do it as soon as possible after taking out the loan. However, as we will mention later on, some lenders could apply early repayment fees as a way of discouraging this practice.
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 amount will include the interest rate, which is dependent on the student or cosigner’s credit history, the type of interest rate (whether fixed or variable), and the total amount borrowed.
Though federal or private student loans offer several different repayment options, such as deferment and forbearance, personal student loans might not. Missing a payment can have adverse effects on your credit, restricting your borrowing ability in the future.
WHAT TO LOOK FOR IN A PERSONAL LOAN PROVIDER
When looking through personal loan providers, pay close attention to the loan’s terms, especially those regarding interest rates and repayment options. The best personal loans will offer adequate rates and low or no fees, which means you can get the money you need for less.
The best way to find out what kind of rates a lender will offer you is to request a rate quote. In fact, searching for quotes from multiple lenders will give you a better sense of what’s available on the market and you'll be able to compare what each company offers and which of them better serves your needs.
However, it’s important to remember that during the quote process 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. Although credit inquiries for prequalification may lower your score by a few points, if you apply for several loans within a few weeks, for example, those multiple inquiries into your credit for the same type of loan and loan amount will count as a single check.
Fees are another thing to review when comparing potential lenders and their offers. Ideally, you would choose a lender that doesn't charge additional fees.
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 to your total loan costs.
IS A PERSONAL STUDENT LOAN FOR YOU?
College students will find the main issue with personal loans is that they can be very expensive.
Because students typically have lower credit scores, banks see them as less creditworthy. They assume that students will have a higher risk of defaulting on their loans, which gives banks greater freedom to charge high-interest rates.
You might end up paying a significantly greater amount for a loan that, theoretically, shouldn't be that expensive. This is significant and should not be treated lightly; agreeing to enter into debt without understanding the risks and implications can significantly affect your credit.
Nonetheless, while taking out a personal student loan might seem like a losing proposition at the moment, there are steps you can take to minimize the amount of debt you’re getting yourself into. The first one is not taking more than the amount you need.
Though it may sound simplistic, many students make the mistake of taking as much as they can regardless of their needs.
To avoid excessively high interests and having to make loan repayments for years to come, borrow modestly and mindfully, always calculating how long it might take you to pay off your loan and what your options would be if you were suddenly unable to make repayments for an extended period.
An additional step you can take to minimize the impact of a personal student loan is budgeting. Being financially literate is key to paying off your student loan as soon as possible while remaining solvent.
Budget carefully to understand how much you can afford to spend and where you can cut down on unnecessary expenses. A good tip to follow is to make a list of all you pay for on a monthly basis, including food, rent, and cell phone payments.
Then, weigh that against your monthly earnings and narrow down on non-essentials such as biweekly outings to restaurants or daily visits to coffee shops. Do the math, it adds up!
Get a creditworthy co-signer
Another good tip is to procure a loan with a creditworthy co-signer, which could land you a lower interest rate and significantly decrease the overall costs of your loan.
A co-signer is somebody who agrees to share the responsibility in the event you're unable to continue paying the loan.
By having another individual assume the debt obligation, lenders minimize risk and can, therefore, offer more favorable terms. A parent, family member, or friend, can co-sign a student loan.
Regardless of who your co-signer is, choosing someone with a higher credit score will be beneficial to your bottom line.
It bears repeating that, as with any other type of loan product, it is essential to read and understand the loan’s terms and conditions, particularly the repayment options, before making a decision.
It’s a shame that the high cost of education nowadays means many students will graduate with a significant amount of debt. While many (if not all) of us would like to leave college with a cushy, well-paying job waiting for us, that is rarely the case.
While writing a student resume can help in quickly finding a job to begin paying off your loans, there are other elements to consider in this equation. 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 the best personal loans providers to get started.