When to Consider a Personal Loan as a Student
You may have used government or private student loans to cover tuition, housing, textbooks, and other higher education expenses. Unfortunately, you may still need additional funds to survive the rest of the semester or to cover a financial emergency.
Credit cards might be an option, but a personal loan might be better. They often have far lower interest rates than credit cards, and some lenders offer quick financing to get you back on track right away. However, before you decide if a personal loan is right for you, there are a few downsides to consider. Some online personal lenders offer services specifically for students.
Student and Personal Loans
Personal loans and student loans can help you survive financially while you are in college. However, having both could be dangerous when it comes time to pay down your debt and your income is low.
Federal loans allow you to qualify for income-based repayment plans. However, private lenders are not always so generous. Regardless of your loan type, if you default on your loan payments, you risk damaging your creditworthiness.
Personal loans differ from student loans in a few key ways:
- type of loan: Student loans are unsecured, meaning they are not backed by collateral. Many personal loans are also unsecured, but some are collateralized and require collateral to secure funding.
- Eligibility Criteria: Typically, you need good or excellent credit and a stable source of income to qualify for a competitive personal loan or personal student loan. However, federal student loans do not have the same strict eligibility criteria.
- purpose of use: You are free to use personal loans as you see fit. However, federal and private student loans should only be used for college expenses, including tuition, fees, books, housing, and supplies.
- financing: Personal loans are deposited into your bank account and student loans are sent to the school’s tax office.
Finally, student loans are ideal if you are looking for funds to meet college-related expenses. However, if you need a more flexible financing option to pay for other types of expenses, a personal loan may be your best bet. Keep in mind that many lenders will require a co-signer if you don’t have a regular source of income and good or excellent credit.
Companies that offer personal loans to students
Through these fintech startups, you can qualify for a personal loan as a student even if you are not currently employed or have little to no credit history.
Fintech startup MPOWER Financing targets high-potential students who are generally not eligible for credit from traditional banks. It offers fixed-rate loans to over 190 nationalities, including Americans attending an accredited school in the United States or Canada, with no collateral required. You also don’t need a co-signer or credit history to qualify.
Loan amounts range from $2,001 to $100,000 (in total) and interest rebates of up to 1.50 percent are available. Once the loan is approved, the funds are transferred directly to the university. During school and six months after graduation, you only pay interest.
If you want to repay your loan early, there are no prepayment penalties. Even better, loan payments are reported to the credit bureaus to help you compile your credit history.
KoraCash is available to students and grads with an .edu email address. You should also be at least 18 years old with a valid social security number and acceptable credit history.
It’s offered through fintech startup Kora, and you could qualify for up to $2,000 with a repayment term of no more than 12 months. Loan payments are reported to the major credit reporting agencies – Experian, TransUnion and Equifax – to help you build a positive credit history.
Kora currently extends loans in Arizona, Arkansas, California, Florida, Illinois, Iowa, Maryland, Michigan, Minnesota, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Utah, Washington and Wisconsin . If you don’t live in one of these states, it’s best to pursue other options.
More personal loan options
If you cannot qualify for a personal loan on your own, consider hiring a co-signer to increase your chances of approval. You can also ask your parents or another relative to take out a loan for you or lend you the money directly.
Home equity loans and home equity lines of credit are another option to secure the funds you need when owning a home. But they can be risky since your home is used as collateral. In addition, it can be difficult to obtain approval if your income or credit rating is low.
Pros and cons of a personal loan as a student
You can qualify for a personal loan as a student, but it may not be a wise financial move. Consider these pros and cons before proceeding.
- Fast financing times: It may take some time before the student loan proceeds are paid to you, but most personal lenders offer quick funding times.
- Lower interest rates than credit cards: The average personal loan interest rate is 10.28 percent, compared to the average credit card APR of 16.13 percent.
- More expensive than student loans: If you can get a federal student loan, you may get a better interest rate than a personal loan. The interest rate on direct-subsidized and directly-subsidized federal student loans is currently 3.73 percent and 5.28 percent for undergraduate and graduate students, respectively. For a private student loan, you pay between 1 percent and 13 percent.
- No reprieve: You start paying off personal loans the following month, but most student loan providers give you the option to defer payments until after you close.
- Your assets could be at risk: When you get a secured personal loan, you risk losing your assets if you default on monthly payments.
If you are in financial distress, a personal loan could be a less expensive option to get the funds you need. But it’s not without its risks, and you should weigh the pros and cons before applying. Depending on your situation and how you want to use the money, a student loan or other funding source might be a better fit.