Student loans vs. personal loans
Private student loans have lower interest rates; personal loans have more flexibility
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The golden rule of student financing goes as follows: Always exhaust your federal student loan options before seeking other types of funding. Federal student loans offer numerous advantages, including fixed interest rates, income-driven repayment plans, potential loan forgiveness programs and generous deferment options.
But what happens when federal aid falls short? This is where private student loans and personal loans come into play, offering additional financial resources to bridge the gap. Each can provide high amounts of funding, but their requirements and spending limitations differ.
- Private student loans cover education expenses, while personal loans have a variety of uses beyond just education.
- Private student loans have longer repayment terms than personal loans, as well as lower interest rates.
- Both private student loans and personal loans require good credit to qualify.
What are private student loans?
Private student loans aren’t offered through the government, but rather through private companies that determine their own rates, fees and lending criteria. These loans cover the gap between the actual cost of attending college and the federal funding you receive.
Unlike personal loans, private student loan funds are intended to be used for a limited scope of educational expenses. Other key differences between the two include:
- Credit requirements: Private student loans typically require good credit, but many lenders allow for co-signers (often in the form of the student's parents) who can help you qualify.
- Minimum and maximum loan amounts: Private student loans often start at $1,000 and go up to the maximum cost of attendance at your selected college.
- Minimum and maximum terms: Private student loans tend to have longer repayment terms than personal loans. Many private student loan lenders max out at terms of around 20 years or so.
- Interest rate range: The interest rate you’ll qualify for varies based on your (or your co-signer’s) credit score. Rates typically range from 4% to 15%, according to the Education Data Initiative.
- Approval time: Online private lenders typically give you a decision on your loan in a few days, with funding taking up to a few weeks to arrive at your school.
- Debt type: Student loans are unsecured debts that don’t require collateral. Instead, you qualify based on your credit score and overall financial profile.
- Disbursal method: Most student loans get disbursed directly to the college or university you’re attending. This ensures that the money is going directly to educational expenses.
The borrower best suited to a private student loan is someone who needs to apply the money to tuition and has a strong credit profile or a qualified co-signer. These borrowers will qualify for lower interest rates than personal loans generally offer.
» COMPARE: Best student loan companies
Pros and cons of private student loans
Private student loans may seem intimidating to some, but they can be beneficial when used correctly. Unprepared borrowers, however, may find private student loans to be a bigger burden than a blessing.
Here are the positives and negatives associated with private student loans.
- Relatively low rates: Student loans have lower rates than personal loans, especially for good-credit borrowers.
- Flexible repayment options: Some lenders allow you to choose from a wide range of repayment terms.
- Simple applications: Compared with the Free Application for Federal Student Aid and the College Scholarship Service Profile, private student loan applications are straightforward and easy to complete.
- Co-signers permitted: Private student loan lenders understand that students likely don’t have strong credit scores, so they allow co-signers.
- Limited uses: Student loans must go toward qualifying educational expenses.
- Difficult to discharge in bankruptcy: Student loans are especially difficult to get discharged during bankruptcy.
- High credit requirements: Federal student loans don’t run a credit check, but many private student loan lenders require good credit or higher.
- No federal repayment programs: With private student loans, you don’t have access to federal programs like income-driven repayment plans or student loan forgiveness.
What are personal loans?
You can use personal loans for nearly any purpose. They’re relatively short-term loans, with most personal loan lenders offering loans of up to five years. The amounts you can qualify for vary greatly, however. Borrowers with excellent credit can qualify for up to $100,000 in funding.
For students, there’s one catch with personal loans: They often can’t be used to pay tuition. Many lenders choose not to abide by strict federal laws that regulate the disbursement of loan funds for education, and these lenders instead choose to simply prohibit their borrowers from using personal loan funds specifically for tuition. However, personal loans are a viable option for other education-related expenses, such as books, computer equipment and college dorm necessities.
Personal loans differ from student loans in some significant ways outside of their permitted uses. Key differences include:
- Credit requirements: Personal loans, like private student loans, require good credit to qualify for worthwhile interest rates. However, not all lenders allow co-signers for personal loans.
- Minimum and maximum loan amounts: Personal loans have a wide range of loan amounts, typically between $1,000 and $100,000.
- Minimum and maximum terms: Personal loan terms typically range from two to five years, though some lenders may offer longer terms.
- Interest rate range: Personal loan interest rates vary based on your credit score, but they can be quite high, even for borrowers with good credit. The average interest rate on a 24-month personal loan as of May 2023 is 11.48%, according to the Federal Reserve Bank of St. Louis.
- Approval time: Personal loans have quick turnaround times. Some lenders promise a same-day or one-business-day turnaround.
- Debt type: Personal loans can be either unsecured or secured, though some lenders may offer only unsecured personal loans.
- Disbursal method: With personal loans, you get the money deposited in a linked bank account. From there, you decide what to do with it.
Personal loans are better for borrowers looking to cover smaller expenses in college, such as living expenses, books and other basic supplies. Since personal loans are shorter-term loans that require immediate repayment, you don’t want to commit yourself to a large amount of personal loan debt.
» COMPARE: Best personal loan companies
Pros and cons of personal loans
Personal loans are popular options because they provide a high degree of ease and freedom. But they’re not perfect. Personal loans work best for specific types of borrowers, and there are some limits to their use.
- Flexible use: You can use personal loans for a whole host of purchases.
- Can be collateralized: You may be able to secure better terms and interest rates for your personal loan with collateral.
- Fast funding: Personal loan funds are typically disbursed within a day to a few days.
- Fixed interest rates: Personal loans have fixed interest rates, meaning your payments will stay the same over the life of the loan.
- Relatively high interest rates: The average personal loan has a double-digit interest rate.
- High credit requirements: Many lenders require good credit to qualify for a personal loan. Others allow bad-credit borrowers but charge them very high interest rates.
- High origination fees: Personal loans typically come with origination fees, adding to their price tags.
- Short borrowing terms: Compared with student loans, personal loans have short borrowing terms of just a few years.
Comparing private student loans and personal loans
Both private student loans and personal loans provide borrowers with access to a lump sum of money, but their purposes, terms and eligibility criteria can differ significantly.
Similarities between private student loans and personal loans
Private student loans and personal loans share a few similarities, including:
- Some private student loans and most personal loans involve fixed monthly payments.
- Credit history and creditworthiness play a role in loan approval and the annual percentage rate (APR) for both.
- Late or missed payments for both types of loans can negatively impact credit scores.
- Both loan types involve online applications that you can complete relatively quickly.
Differences between private student loans and personal loans
There are clear differences between private student loans and personal loans, especially when it comes to educational expenses. These differences include:
- Student loans are primarily intended for educational expenses, while personal loans can be used for various purposes.
- Student loans often have lower interest rates than personal loans.
- Student loans frequently offer deferment options while the borrower is in school, but personal loans typically require immediate repayment over a shorter term.
- Student loans often allow for co-signers, but not all personal loans do.
“Personal loans are versatile and can be used for a wide range of purposes, such as consolidating debt, home improvements, medical expenses or even a dream vacation,” explained Seth Jacobs, a manager of LeaderOne Financial Corporation’s branch in Brunswick, Maine. “Student loans are specifically designed to cover educational expenses, including tuition, textbooks and living costs during a student's academic journey.”
What is the best way to pay for college?
There is no right way for every student, but generally, it’s best to apply for federal aid before private loans. Federal aid comes with lower interest rates, more flexible repayment structures and potential forgiveness. If you still need funding after this, grants and scholarships are your next avenue. Only from there should you consider covering the rest with private student loans.
Does it make sense to consider taking out private student loans?
When you want a college education and have exhausted all other funding options, private student loans tend to make more sense than personal loans. That said, only take the time to apply if you have good credit or a co-signer willing to work with you. Otherwise, you’ll likely be denied.
Can personal loans be used for anything?
Though there are relatively few limitations with personal loans, you typically can’t use them to pay for certain types of property or college tuition. Other than that, almost any other (legal) purchase is up for grabs.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Education Data Initiative, “Average Student Loan Interest Rate.” Accessed Aug. 22, 2023.
- Consumer Financial Protection Bureau, “Busting myths about bankruptcy and private student loans.” Accessed Aug. 22, 2023.
- CNBC, “Here’s why you can’t use some personal loans to pay college tuition.” Accessed Aug. 22, 2023.
- Federal Reserve Bank of St. Louis, “Finance Rate on Personal Loans at Commercial Banks, 24 Month Loan.” Accessed Aug. 22, 2023.
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