- Private Loans
- A private loan is a loan made by a non-federal institution such as a bank, school or state agency. The distinction most commonly applies to student loans. Private loans are often more expensive than federal loans and come with less-flexible payment terms.
What are Private Loans?
A private loan refers to any loan issued by a non-federal agency. This includes loans issued by banks, credit unions, mortgage lenders, schools or state agencies. The term “private loan” is most often used when discussing student loans. Federal loans are issued by the U.S. Department of Education.
When applying for student loans, it is a good idea to target federal loans before applying for private loans. Federal loans, such as Stafford or Perkins loans, generally come with lower interest rates and more flexible payment terms.
The differences between federal and private student loans include:
- Federal loans do not require repayment while you are in school. Some private student loans might.
- Federal loans have fixed interest rates, while private loans can have variable interest rates.
- Federal loans do not require a credit check.
- With a subsidized federal loan, the government pays the interest while you are enrolled.
- Federal loans do not require a co-signer.
- Federal loans do not carry a prepayment penalty. Some private student loans might.(1)
Because federal loans are issued by the United States of Government, they can afford far better terms and interest rates than private loans can. However, private loans are still an important aspect of paying for education. Just make sure to do your research before you sign on the dotted line. A large private loan with unfavorable terms could leave the borrower struggling to pay for years to come.
- “Federal Versus Private Loans” Federal Student Aid. Accessed January 19, 2016 https://studentaid.ed.gov/sa/types/loans/federal-vs-private