Private Student Loans 101

Summary

This lesson explains the key differences between private loans and federal loans, focusing on their higher interest rates, stricter credit requirements, and limited repayment options. It emphasizes that private loans should be used as a last resort after scholarships, grants, and federal loans. The script also highlights the importance of understanding your credit score, finding a good cosigner, and the freedom to shop around for better rates within 30 days. Additionally, it covers the right to cancel a loan without penalty within three business days.

Takeaways

• 💼 Private loans are educational loans from banks or schools not insured by the federal government.
• 💰 They usually have higher interest rates, fewer payment postponement options, and stricter credit requirements compared to federal loans.
• 🚫 Private loans should be considered as a last resort after exhausting scholarships, grants, and federal loans.
• 🏦 The terms 'lender' and 'borrower' are crucial, with lenders providing funds and borrowers being responsible for repayment.
• 🔍 When applying for a private loan, your credit report and score are checked to assess the risk and determine the interest rate.
• 📉 Lenders look for a minimum credit score and no major credit issues like bankruptcy or delinquencies in your credit report.
• 🤝 Some lenders may require a cosigner with good credit to qualify for a loan, which can influence the interest rate and repayment cost.
• 📅 You have 30 days from approval to accept or reject the terms of your private loan, and shopping around for better rates should be done within this period.
• ❌ You can cancel a loan without penalty within three business days of the loan's completion.
• 📚 The next lesson will focus on interest rates, repayment terms, and fees associated with private loans.

Q & A

What is the primary purpose of a private loan in the context of education?

A private loan is used to cover the remaining cost of education after scholarships, grants, and federal loans have been exhausted.

Why are private loans considered a last resort for financing education?

Private loans should be a last resort because they typically have higher interest rates, fewer options for postponing payments, and more stringent credit requirements compared to federal loans.

What is the difference between a lender and a borrower in the context of private loans?

The lender is the entity providing the money, such as a bank or school, while the borrower is the individual who requests and uses the money and is responsible for repaying it after completing their education.

Why is a credit check necessary when applying for a private loan?

A credit check is necessary to determine the risk the lender takes in loaning money, which affects the approval of the loan and the interest rate offered.

What are lenders looking for in a borrower's credit report for private loans?

Lenders look for a minimum credit score and ensure there are no major credit problems like bankruptcy or delinquencies.

What is the role of a cosigner or co-borrower in a private loan application?

A cosigner or co-borrower is required by some lenders to qualify for a loan. If the primary borrower cannot repay the loan, the cosigner is obligated to do so.

Why are parents or relatives often chosen as cosigners for student loans?

Parents or relatives are often chosen as cosigners because they may have better credit, which can lead to a lower interest rate for the student borrower.

How does the credit of a cosigner impact the cost of a private loan?

The better the cosigner's credit score and history, the lower the interest rate on the loan might be, resulting in less money to be paid back over time.

What is the time frame within which a borrower can accept or reject the terms of a private loan?

Borrowers have 30 days from the time their application is approved and they receive disclosure statements to accept or reject the terms of a private loan.

Is it possible to shop around for better rates with other lenders without penalty?

Yes, borrowers can shop around for better rates within 30 days of application approval without penalty, but additional credit checks could potentially hurt their credit score.

Under what conditions can a borrower cancel a private loan without penalty?

A borrower can cancel a loan without penalty at any time within three business days of the date the loan is completed.

Outlines

00:00

💼 Understanding Private Loans

This paragraph introduces the concept of private loans as a means to cover educational costs when scholarships, grants, and federal loans are insufficient. It explains that private loans, which are provided by banks or schools and not insured by the federal government, typically have higher interest rates and fewer repayment options compared to federal loans. The paragraph emphasizes that private loans should be considered a last resort after all other financial aid options have been exhausted. It also introduces key terms: 'lender', who provides the money, and 'borrower', who requests and eventually repays the loan. The importance of credit checks for private loans is highlighted, with lenders assessing credit reports and scores to determine the risk and interest rates. The role of cosigners, often parents or relatives with good credit, is discussed as they can significantly influence the loan's cost by affecting the interest rate.

Keywords

💡Scholarships

Scholarships are financial aid programs that are awarded to students based on various criteria such as academic achievement, talent, or need. They are a key part of the video's theme as they represent one of the initial sources of funding students explore before considering private loans. In the script, scholarships are mentioned as the first financial aid option students should exhaust before turning to private loans.

💡Grants

Grants are another form of financial aid that students can receive without the obligation to repay. They are typically awarded based on financial need or other specific criteria. The video emphasizes the importance of exploring grants as a funding source before resorting to private loans, which come with repayment obligations.

💡Federal Loans

Federal loans are loans provided by the government, usually with favorable interest rates and flexible repayment options. The script contrasts federal loans with private loans, highlighting the benefits of federal loans as a more desirable form of financial aid due to their lower interest rates and more lenient repayment terms.

💡Private Loans

Private loans are educational loans provided by banks or schools that are not insured by the federal government. They are the focus of the video, as they often come with higher interest rates and less flexible repayment terms compared to federal loans. The script explains that private loans should be considered as a last resort after other funding options have been exhausted.

💡Interest Rates

Interest rates are the percentage of the loan amount that is charged as interest over a period of time. In the context of the video, interest rates on private loans are a significant concern as they are typically higher than those of federal loans, impacting the total cost of borrowing and repayment.

💡Credit Score

A credit score is a numerical representation of an individual's creditworthiness, based on their credit history. The video explains that lenders use credit scores to assess the risk of lending to a student, which directly influences the approval of a private loan and the interest rate offered.

💡Cosigner

A cosigner is a person who agrees to be equally responsible for repaying a loan if the primary borrower fails to do so. The script mentions that some lenders require a cosigner for private loans, and the creditworthiness of the cosigner can significantly affect the loan's interest rate and terms.

💡Credit Report

A credit report is a detailed report of an individual's credit history, which includes information on their credit accounts, payment history, and any outstanding debts. The video emphasizes that lenders review credit reports to determine a borrower's eligibility and interest rate for private loans.

💡Repayment Terms

Repayment terms refer to the conditions under which a loan must be repaid, including the schedule, amount, and any penalties for late or missed payments. The script suggests that private loans often have less flexibility in repayment terms compared to federal loans, which is an important consideration for students.

💡Disclosure Statements

Disclosure statements are documents provided by lenders that detail the terms and conditions of a loan, including interest rates, repayment terms, and fees. The video mentions that students have 30 days from the receipt of disclosure statements to accept or reject the terms of a private loan.

💡Loan Approval

Loan approval is the process by which a lender decides whether to grant a loan to a borrower. The script explains that loan approval for private loans is contingent upon meeting minimum credit score requirements and having no major credit problems, as assessed through the borrower's credit report.

Highlights

Scholarships, grants, and federal loans might not fully cover education costs.

Private loans are often necessary to fill financial gaps.

Private loans differ significantly from federal loans.

Private loans have higher interest rates compared to federal loans.

There are fewer options to postpone payments with private loans.

Private loans require more stringent credit requirements.

Private loans should be considered as a last resort after other financial aid options.

A private loan is a loan from a bank or school not insured by the federal government.

Lenders provide the money, while borrowers are those who request and repay the loan.

Credit checks are necessary when applying for a private loan.

Lenders assess credit reports and scores to estimate risk.

Meeting minimum credit score and having no major credit issues are crucial.

Cosigners or co-borrowers may be required for private loans.

A cosigner's credit score and history can significantly affect the loan's cost.

Students often use parents or relatives with good credit as cosigners.

Borrowers have 30 days to accept or reject the terms of a private loan.

Shopping around for better rates should be done within 30 days of approval.

Loans can be canceled without penalty within three business days of completion.

The next lesson will focus on interest rates, repayment terms, and fees.

Transcripts

Sometimes scholarships, grants, and federal loans just aren't enough to cover the cost of

your education. So if you're like most students, you got a private loan

to fill in the missing piece of the puzzle. These loans are very common

and often very necessary, but they are a lot different from federal loans.

In this lesson, you'll find out how and why and what those differences will mean to you

when it comes time to repay your loans.

First things first, what is a private loan? In simple terms,

it's a loan from a bank or your school that isn't insured by the federal government.

Private loans typically have higher interest rates, less options to postpone payments,

and more credit requirements than federal loans.

This is why private loans should be your last resort. After scholarships,

after grants, and after you've gotten all the federal loans available to you.

Before we get into more detail, lets talk about two terms we'll use quite a bit:

lender and borrower. Lenders are simply the people who provide the money.

The borrower is the person who requests the money, uses the money,

and eventually has to pay back the money once school is over.

In this case, of course, that's you.

Did you know that when you apply for a private loan you need to have your credit checked?

In that way, private loans are a lot like any other major loan

such as a car loan or a mortgage. Lenders look at your credit report and credit score

to estimate their risk in loaning you money, and that determines not only your approval

for a private loan but also your interest rate.

So, what exactly are lenders looking for in your credit report?

Well, they wanna make sure you first meet the minimum credit score,

and second that you have no major credit problems such as bankruptcy or delinquencies.

Some lenders will require a cosigner or a co-borrower in order to qualify you

for a private loan. In this case, the lender would look at both your credit report

and theirs. So if you are not able to pay your loan back,

your cosigner would be required to do so. A lot of students use their parents

or other relatives as cosigners. The best cosigners are those that have good

if not excellent credit as their score and history will play a significant role

in the cost of your loan. As in the better their credit, the lower your interest rate

might be. And the lower your interest rate, the less money you'll have to pay back

in the long run. Okay, so what if your lender has approved you for a loan,

but you don't like the rate? Do you have to take that loan? Nope.

You actually have 30 days to accept or reject the terms of your private loan.

That's 30 days from the time your application is approved

and you receive disclosure statements. If you think you want to shop around

for better rates with other lenders, make sure you do it within 30 days.

Otherwise, those extra credit checks could hurt your score.

You can also cancel a loan without penalty at any time within three business days

of the date the loan is completed.

In the next lesson, we'll take a closer look at interest rates

along with repayment terms and fees.