How Does a Personal Student Loan Work?

The Basics

Most students apply for personal student loans when they need more money for their education than they were able to obtain in scholarships, grants and federal student loans. Students can apply for these loans online through a number of private loan companies, such as Bank of America, Wachovia, Wells Fargo and Chase. These loans are usually disperse in one or two installments, typically at the beginning of the school year, semester or quarter, and are supposed to be used strictly for school and school-related expenses, which can include books, food, tuition, housing and other expenses incurred during the school year.

Qualifications

Because students typically possess little to no credit, it is a good idea to get a parent or other close relative with a good credit score to co-sign on a private student loan. This may result in higher loan limits that will almost always have a lower interest rate than any loan the student would obtain on his own. Many personal student loans typically offer lower interest rates than other personal loans that would be used for a car, home or other item that costs a significant amount of money. This is because an education is considered a great investment in one's future and, as such, the student must be enrolled at least part time in a community college, university or trade school program to ensure that the money is not being used for alternative purchases. Depending on the lender, however, some personal student loans may have interest rates that are based on the prime rate, which may be adjusted monthly.

Repayment

Because lenders realize that most students, especially those who need to apply for personal student loans, are strapped for cash, many offer flexible repayment plans to lure business their ways. Students worried about graduating with a heavy debt to pay off may begin repaying the loan immediately in monthly installments. Others can opt to pay only interest on these personal loans while they're in school, which is called a partial deferment. Some would rather delay the loan payments until after they graduate and obtain a job that will allow them to repay the loan in a timely fashion. Note that most federal student loans do not begin repayment until 6 months after a student graduates.

Resources

• Personal Student Loans