Unlike a federal student loan, private student loans are offered by private institutions, banks, lending institutions and anyone who is willing to give you the money in advance so that you can attend school.
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 very high credit rating to get money from these independent companies. If you do not have a good credit rating or have not had time to develop a credit rating, you can have a parent cosign the loan so that their credit is run through the application, rather than yours. 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 and make sure that parents are financially viable and able to do this before creating a co-signing agreement. 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
-May 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 and these can increase over time or fluctuate, 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 don’t have collateral in most cases, your credit rating is their collateral or promise that you’re going to be able to pay them. They also want to run your credit through or learn what your income-to-debt ratio is because this is how they usually decide if you are a low enough risk to take a chance. If parents or grandparents have a lot of money and are willing to use collateral or their credit as some security, it might be easier to get a private 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.