What is a Private Educational Loan?

A private loan is an educational loan offered by a private lender. Private lenders can be either for-profit or non-profit. These loans can be used to cover educational costs that the financial aid award letter does not cover.

Eligibility for these loans is usually based on the borrower’s credit score. In some situations a student may be able to borrow a private loan on their own (without a co-signer). In order to borrow a private loan in the borrower’s name alone, the lender may require a certain level of earned income or a couple years of continuous employment. If a borrower does not meet the lender’s credit criteria or other requirements for the loan, (s)he may need to get a co-signer for the loan.

Co-signer
Co-signing a loan is the process of putting another name on the borrower’s private loan. A co-signer is liable for the loan if the borrower becomes delinquent on the loan payments. A co-signer must be creditworthy (by the private loan lender’s terms) and meet all other requirements of the private loan lender. If a borrower is creditworthy and could borrow a private loan on his/her own, it may still be beneficial to have a co-signer on the loan. Having a co-signer on the loan gives the lender more assurance that the loan will be repaid.  Therefore, many lenders will drop the interest rate (or fees) on the private loan if the borrower has a co-signer.

Some lenders may give a co-signer release option for a co-signer after the borrower makes a number of on-time payments. The lender may also run a credit check on the borrower once the co-signer release is requested and base their decision on the borrower’s creditworthiness.

Loan terms
Since private loans are held by private lenders, they will not have the same loan terms as a Federal Stafford loan. More than likely, your interest rate will be higher with a private loan when compared to a Federal Stafford loan. Therefore, be sure that you have borrowed your yearly maximum through the Stafford loan program before you apply for a private loan.

Deferments
Most private loans can be deferred throughout your college enrollment as long as you are degree-seeking and enrolled at least half-time. Many private loans will also offer a grace period after your graduation (or after the point in which you cease to be enrolled in a set number of credit hours) in which you will not be expected to make payments.

Interest
More than likely, interest will start to accrue on a private loan at the time it is disbursed. You may have the option of deferring payments on this interest while you are enrolled. Otherwise, you can make payments on the interest while you are enrolled. Some private loans capitalize unpaid interest while you are enrolled.  Others may be capitalized when you go into repayment. Capitalization of interest is the process of taking the unpaid accrued interest on your loan and adding it to your principle loan amount. If you pay the interest off as it accrues on your loan there will be no interest to capitalize, and your principle loan amount will not increase.

Since most private loans are based on your credit, interest rates may fluctuate from one private loan lender to another (based on the level of credit they associate with a certain interest rate). Most private loan interest rates are variable, so they will vary according to the market rate on which the interest rate is built. Private loan interest rates are based on some sort of market rate, such as Prime or LIBOR (London Interbank Offered Rate). Lenders usually disclose the market rate that their private loan is based upon on their web site. Once you secure a private loan, the variable rate will follow the market rate up or down for the life of the loan.

Loan Fees
Some private loan lenders will charge fees in addition to interest on the loan. These fees mainly come in the form of an origination fee or a repayment fee. An origination fee is charged on the front-end of the loan, and is usually deducted from the loan amount that the borrower requests. Repayment fees are charged once the borrower enters repayment on the loan. The amount of origination and/or repayment fees that are charged will more than likely be dependent on your (or co-signer’s) credit score.

Repayment term
A repayment term is the amount of time over which a lender will allow the loan to be repaid. The repayment term begins once the borrower enters loan repayment. Most private loans have repayment terms of 10-20 years, although some lenders may have shorter or longer repayment terms. Keep in mind, the longer the period of repayment, the more you will repay in the end (as interest will accrue throughout the loan repayment period). Please see the enclosed repayment schedule for estimated private loan repayment information.

Borrower Benefits
Some private loan lenders may offer borrower benefits with their private loan product. An example of a borrower benefit is below:

A private loan lender offers to reduce your interest rate by .25% if you have your payments automatically withdrawn from your banking account.

Be sure to read the fine print when considering borrower benefits. These can usually only be attained once the loan enters repayment, and may consist of strict terms that are hard to meet.

Comparisons
In order to get a full comparison of your private loan terms with numerous lenders, you may be tempted to apply through a number of lenders and pick the lenders with the best loan terms. Please take caution in this approach. If you have a number of lenders checking your credit in a short amount of time, it is likely that your credit score will decrease. It is best to research one or two private loan lenders, submit the application(s), compare loan terms once the loan(s) has been approved, and decide which loan to accept.