Private student loans are offered by private institutions, banks, and lending institutions. If you’re considering taking out a private student loan, here’s what you should know beforehand.
Private loan companies do not have the backing of the federal government. They are independent entities and they require that you illustrate to them that you have some collateral. If you do not have collateral, you will need a good credit rating to get money from these independent companies. Another option is to have someone with strong credit cosign with you. This does put the person who cosigns a loan in financial risk, because if you are unable to pay for any reason, the company can take action to get the money from the cosigner.
Parents and students should discuss this option carefully. Make sure that parents are financially viable and able to do this before creating a co-signing agreement.
Risks of Taking out a Private Student Loan
Some of the risk involved in private student loans are listed below:
- Can harm your credit rating if you don’t pay it back on time
- May keep you from borrowing other money until it is paid off
- Can put the cosigner at risk for financial liability
- May have a higher than reasonable interest rate especially if your credit rating is not good
- Might or might not be backed by a company that has a good reputation
- Often uses variable interest rates more than federal government loans. These can increase over time or fluctuate, and make the estimated payoff amount unpredictable
With private loans, it is pretty much like going to a bank and asking them for money. Since you typically don’t have collateral, your credit rating is your promise that you’re going to repay the loan.
The most significant risk with private loans is that the company has no recourse except to sue you for the money if you do not pay them back according to the agreement that you sign of the time of the loan. Unlike the federal government, they cannot press criminal charges, but they might come after you in civil court to get the money that you owe them.
Regardless of what kind of loan you take out to make sure you think about it and prepare and also realize that some private loans have to be paid back while you’re still in school.