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When to consider getting a personal loan as a student

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You may have already utilized federal or private student loans to pay for expenses related to higher education, such as tuition fees, housing, and textbooks. However, it seems that you may require more funds to cover your living expenses for the rest of the semester or deal with any unforeseen financial emergencies.

While credit cards are one option, a personal loan may be a better choice due to its lower interest rates. Some lenders may provide quick funding to help you get back on track promptly. However, before deciding whether a personal loan suits your needs, there are several factors to take into account.

Students and personal loans

Taking out personal loans and student loans during college can provide financial support. But it can be risky to have both if your income is insufficient during repayment.

You may be eligible for a repayment plan based on your income if you have federal loans. Private lenders, however, may not offer such options. Falling behind on loan payments can harm your credit score, regardless of the type of loan.

There are several significant differences between personal loans and student loans.

  • Loan type: Student loans and some personal loans are unsecured, meaning they do not require collateral. However, some personal loans may be secured and require collateral for funding.
  • Eligibility criteria: To get a personal loan with favorable terms or a private student loan, it’s usually necessary to have a strong credit score and reliable income. On the other hand, federal student loans are granted based on your academic standing.
  • Usage: Most lenders do not allow you to use personal loans for tuition-related expenses. However, federal and private student loans are specifically for higher education expenses such as tuition, fees, books, housing, and supplies. Otherwise, personal loans can be used at your discretion.
  • Funding: Personal loans will be directly transferred to your bank account, whereas for student loans, the funds are sent to the financial aid office of the school.

If you need money specifically for college expenses, then student loans are a good option. However, if you require funding for other types of expenses and want more flexibility with how the money is used, then a personal loan may be a better choice.

Pros and cons of getting a personal loan as a student

As a student, you could be eligible for a personal loan, but it might not be a wise decision from a financial standpoint. Make sure to evaluate the advantages and disadvantages before proceeding.

Pros

  • Fast funding times: Getting your student loan money may take a while, whereas most personal loan lenders give you the funds as early as one week after approval.
  • Personal loans have lower interest rates than credit cards. The average interest rate for personal loans is 10.97 percent, while the average APR for credit cards is 20.36 percent.

Cons

  • Getting a personal loan is more costly compared to student loans. Federal student loans offer better interest rates compared to personal loans. For instance, undergraduate and graduate students can enjoy interest rates of 4.99% and 6.54% on Direct Subsidized and Direct Unsubsidized federal student loans, respectively. On the other hand, a private student loan will attract an interest rate of between 4.5% and 16%.
  • No deferment: For personal loans, you need to start making payments from the next month. However, with most student loan lenders, you can delay payments until six months after you graduate.
  • Your assets could be at risk: Taking out a secured personal loan means that your assets may be taken away if you fail to make your monthly payments on time.

Lenders that offer personal loans to students

As a student, you can still be eligible for a personal loan from fintech startups, even without a job or much credit history.

Upstart

If’re a student seeking a personal loan, Upstart could be a great option. The online platform provides personal loans up to $50,000 to be repaid over a period of three to five years. What sets Upstart apart is its cutting-edge AI-powered underwriting process which considers factors beyond your credit score and income.

Upstart is a personal loan lender that does not require a minimum credit score, which makes it a good option for students who may not have established credit yet. Furthermore, funding can be received as soon as the following day. However, Upstart has loan APRs capped at 35.99% and an origination fee of up to 10% of the total loan amount, which can result in a costly loan.

Kora

To be eligible for KoraCash, you must have a .edu email address as a student or recent graduate. Additionally, you need to be at least 18 years old, have a valid Social Security number, and have a satisfactory credit history.

You can apply for a loan with Kora, a fintech startup, and potentially receive up to $3,000. The loan must be repaid within 24 months. Your payments will be reported to the three major credit bureaus (Experian, TransUnion, and Equifax) to help you establish a good credit history.

Suppose you live outside Arizona, Arkansas, California, Florida, Illinois, Iowa, Maryland, Michigan, Minnesota, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Utah, Washington, or Wisconsin. In that case, you should consider other lending options, as Kora currently only lends in these states.

What to do if you don’t qualify for a personal loan

If you’re having trouble qualifying for a personal loan on your own, you can improve your chances by asking someone to cosign with you. It’s also a good idea to consider asking your parents or other relatives to take out a loan in your name or lend you the money directly.

Bottom line

If you face financial difficulties, taking out a personal loan may be a viable solution with lower costs. However, it is not free of risks, and it is essential to weigh the pros and cons before applying. Depending on your circumstances and your intended use of the money, a student loan or other financial aid may be a more suitable option.

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