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Applying for Private Student Loans - Pros and Cons

Written By Devi Kristanti on Sunday, September 14, 2014 | 10:42 PM

One must consider carefully the different programs available when deciding on loans. Most Federal student loan schemes offer ample aid without background checks. The most popular is the unsubsidized loan that accumulates interest while the student is pursuing his studies, however, it is based on needs of the student and has relatively stringent criteria. At times, even when the student is on such loans, unsubsidized loans only provide for part of the total expenditure needed. Another alternative would thus be the private loan.

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However, Private loans have their own set of advantages and disadvantages. Private loans are highly based on the credit score of the applicant. The credit history of parents are taken into consideration when deciding on the student's loans. Thus for those with a less than satisfactory credit history, they usually pay a higher interest premium. Not only do they have high interest premiums, they have additional charges as well. For example, if the amount borrowed is $4000, approximately 4% is paid as fees before the loan is given out. The commission or fee, is taken from the amount of the loan, and this just means that the applicant actually pays $160 that he does not get to use. A rule of thumb to go by is that for every 3% of additional fee one must pay, it would average out to 1% more of the interest rate.

The major advantage of private loans is that they are easily available. As the main goal is still to turn a profit through interest and commissions, such schemes are attainable for most applicants. On every loan application, they try their level best to get the loan approved. On the hand, the Federal lenders have stringent criteria to adhere to when they consider an application and once an application is turned down, it is rare for a federal loan to be given. Professionals are trained to resolve problems of customers quickly so as to give as much customer support as possible, for private loans. Whereas Federal loans usually have limited staffs where quality do not usually meet the service provided by private lenders.

In addition to availability and better customer service, Private loans are preferred for few other practical considerations. This is different from Federal student loans as the borrower doesn't need to give details in the FAFSA (Free Application for Student Aid) forms or give supporting documentation. But bear in mind that the interest premiums and charges will be different and based on the different features of the scheme. Among all the private loan schemes, it would be best to have one without charges and an interest premium equivalent to the 1% prime rate. The fees that banks charge one another for their prime customers is known as 'Prime rate'. It is a good time when the interest rate is below that of the prime rate or at the same amount. Take note that it is essential to ascertain that there are no hidden fees as it can add a hefty amount to the entire outlay of the loan.

To avail a private loan with such features depends on good credit score of the applicant or the co signer. You should make deeper inquiries by ascertaining the background and history of private lenders. Alternatively, you can shop online to see the different schemes catered to applicants and you can even see specific loan schemes at sites such as (www.finaid.org/loans/privatestudentloans.phtml). You can also get loan calculators online at (www.bankrate.com/brm/rate/calc_home.asp) that would help you check some sample scenarios. It is essential to consider the payment in light of the initial fees paid and the interest that is paid throughout the entire term of the loan to get the full outlay of the loan when deciding on the feasibility.

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