Private Education Loans Should Be Carefully Compared Before Borrowing

For many families, borrowing is one of the key components of financing a college education. To that end, a family may utilize one of the many education loan options that are available, such as private education loan programs available from lenders.When a family borrows an education loan, they essentially rely on future income sources to pay college costs, as they will be repaying the education loan back in the future. Since loans need to be paid back, the loan repayment will be an added responsibility in the future and one that needs to be taken very seriously. Loans are not free and actually can be very expensive. It is imperative that if you do borrow a private education loan that you be a smart borrower, as decisions that you make now will impact your life style and options in the future. Students should first maximize loan borrowing through the Federal Direct Stafford Loan Programs, if eligible, which have favorable terms, various repayment options, and typically are the lowest cost loans.

Private education loans, also referred to as alternative loans, are credit based loans offered by lenders, including banks, credit unions, state agencies, and private companies. It is important to understand the role of credit in the private loan process, as private loans are not automatic financing options. Private loan programs use a borrower’s and co-borrower’s (if applicable) credit worthiness as a determinant when considering applicants for private loan eligibility. A borrower’s credit worthiness not only determines if they are approved for the loan, but has a bearing on the interest rate assigned to the loan. Ultimately, when talking about private loans, your credit rating is a very important contributing factor in the private loan review process.

Although specific lender underwriting guidelines are proprietary information and unpublished to the consumer, it is known that the strength of the applicant’s credit is a large factor. With that said, it is a worthwhile exercise to review your personal credit standing regardless, as establishing and maintaining good credit is vital for many reasons. In general, credit is the basis of most consumer borrowing, thus being proactive with credit is a positive practice.

Before borrowing a private education loan, you should carefully compare the terms, repayment details, and total cost of the loan, including interest rate and fees. Loan terms and repayment details vary greatly among lenders and between loan programs, so do be sure to compare loan details carefully and ask the lender many questions when reviewing loan programs. Important information to inquire about includes whether the rate is fixed or variable, if the loan incurs any fees, if there is a prepayment penalty, what the length of the repayment term is, and if there are any deferment or forbearance provisions available. Loan applicants will be provided with a disclosure notice with the financing details of the loan which provides a good opportunity for the borrower to review the minute details of the loan prior to committing. Just be sure to ask many questions and compare several loan programs before committing to a specific. Check out the website Financial Aid Sense for a complete guide on how to compare private loan programs.

Alternative Loans Compared

Banks generally offer lower interest rates than alternative lenders. However, many have strict lending requirements that leave some borrowers without traditional loan options. Thus, there is a market for alternative loans, as borrowers have to get money from somewhere.

Alternative loans include car title loans, payday loans and personal loans from friends and family. Let’s compare these types of loans.

Practicality

When shopping around for a loan, it may seem best to go with a loan from a friend or family member. If you have someone that you fully trust that is willing to lend you money, this may just be the way to go. Still, this is a risky venture for several reasons.

First, consider what will happen if your friend or family member refuses your offer. Will this person be offended that you even asked? Will you be upset that he or she won’t give you a loan?

Second, consider what will happen if either you or the lender fails to meet a provision of your agreement. For example, what if your friend decides to back out of part or all of the loan. Will your friendship be strained?

Doing business with family and close friends can be very beneficial, but it also can damage or ruin a relationship. With this in mind, it may only be best to seek a loan from a friend or family member if there is an unbreakable trust.

Note that with a pawn loan, you’ll have to transport an item to the pawn shop. This could be a hassle if you are pawning a large item.

Payday loans and car title loans typically just require documents, making them among the most practical to obtain of the various types of alternative loans.

Interest Rates

Interest rates on loans from family and friends will almost always be lower than those on other alternative loans. However, keep in mind that you will risk your entire relationship with such a person.

Interest rates on payday loans are very high. To illustrate this, the typical annual interest rate on payday loans in Missouri is 445 percent.

On pawn loans, the rates are a bit lower. For example, Texas law allows for a maximum of 240 percent in annual interest charges.

Car title loans are in the middle with an average annual interest rate of approximately 300 percent.

Note that you’ll find a wide range of interest rates for all of the mentioned loan types, so you can get a much lower rate that mentioned by shopping around. For example, some car title lenders offer rates at half of the mentioned interest rate, which would save you a lot of money when compared to average lenders.

Risks

Any type of loan carries risks.

With a loan from a friend or family member, you will risk damaging the relationship. Also, if you do not pay the loan back properly, the issue could ultimately end up in court.

With a payday loan, you also run the risk of being taken to court. If a judgment is awarded in favor of the lender, you could end up having your wages garnished, a lien against your assets or some other type of problematic financial situation. Borrowers of such loans default 10 to 20 percent of the time.

Pawn loans involve the risk of total loss of the relevant asset. For example, if you pawn your television and do not pay the loan back, the pawn shop will keep it and eventually sell it. Approximately 20 percent of pawned items are not returned, based on information from the National Pawnbrokers Association.

Car title loans involve a risk to the borrower’s vehicle. If the loan is not repaid, the vehicle may be repossessed. This happens 4 to 8 percent of the time, making such loans less risky than payday loans and pawn loans.

Conclusion

Of the various types of alternative loans, a personal loan from a friend or family member will usually be the cheapest. However, this method of borrowing can be very awkward and strain a relationship.