As a student, parent, or student borrower, it’s important to understand your options for borrowing for school or refinancing student loans. Specifically, you can compare private student loans to personal loans and consider which is better for you.
Although these two types of debt share some similarities, they have major differences. Choosing the right type of loan ensures you get the funds you need now and affordable payments later.
Here’s what you need to know about the similarities between private student loans and personal loans — and how they’re not.
Compare student loans to personal loans
A private student loan and a personal loan have certain essential characteristics in common:
- Financed by private lenders: Unlike federal student loans which are funded by the government, personal loans and private student loans are both provided by private lenders: online loan providers such as SoFi, banks such as Citizens Bank, or credit unions .
- Good credit and borrowing criteria: A private student loan and personal loan generally require a credit check as part of the loan application and approval process. A federal student loan, on the other hand, has no credit score or income requirement.
- Unsecured debt: Personal loans and private student loans are unsecured debt. This means that funds loaned through either product are not secured by any assets or collateral.
- Installment loans with fixed payments: With both types of loans, the money is funded up front in a lump sum and then repaid over a fixed term with monthly payments – called installments.
The personal loan and the private student loan are two forms of credit whose structure is comparable, but which are not interchangeable. There are important and essential differences that borrowers should be aware of.
1. What you can use the loan for
The biggest difference is the types of expenses each loan can be used to cover.
A personal loan can actually be used to pay almost anything. Unlike a mortgage, car loan, or even a student loan, the terms of the loan are not tied to its intended use (although some lenders may have some restrictions on their use).
This makes personal loans a popular financing option for a range of purchases. From emergency expenses to major life events like moving or getting married, to debt consolidation.
However, when a borrower takes out a private student loan, they are legally required to limit the use of these funds to university costs such as tuition. You can also use student loans for education-related expenses, such as childcare for dependents, a new laptop for schoolwork, or even your rent or phone bill.
You can also use a new private student loan to refinance existing student loan debt.
2. What kind of interest rate you can get
Typically, private student loans will carry much lower interest rates and cost less to borrow than personal loans.
See for yourself by comparing different private student loans and personal loans on our marketplace. You’ll see that private student loan rates start at around 4%, while the best personal loan deals are around 7%.
The lower rates on a private student loan mean that they will generally be a cheaper way to borrow. If you’re borrowing to pay college fees or refinance student debt, a private student loan from a lender like College Ave is probably the most affordable choice.
Check Out College Ave Student Loans Here
3. How loan funds are disbursed
Another key difference is how lenders disburse funds borrowed through private student loans versus personal loans.
With a personal loan, the funds are deposited into the borrower’s account after the loan is approved. And, the loan agreement finalized. The borrower is then free to use this money for whatever he wants.
Private student loans, however, follow a different process:
- Student loans are first disbursed through your financial aid office.
- The financial aid office uses your student loan money to cover unpaid tuition or other fees.
- You can then claim the remaining funds and use them to pay tuition fees.
Private student loans can also be used by borrowers who have left school to refinance student debt.
Through this process, you can apply to a lender that offers student loan refinance for a new loan up to the total amount required to fully pay off existing student debt.
Upon approval, the refinance lender will send payments directly to the existing debt student loan officer to pay them off in full, on behalf of the borrower.
4. If the debt is dischargeable
Personal loans and private student loans are treated differently in bankruptcy.
Personal loans are considered consumer debt and are dischargeable through bankruptcy. If a borrower cannot pay their debts and must declare bankruptcy, personal loans can be canceled or canceled through this process.
Private student loans, on the other hand, are much harder to repay than other consumer debt.
Typically, courts reject applications for the discharge of federal or private student loans in bankruptcy. The filer must appeal the denial and prove that they suffered undue hardship in discharging student loans in the event of bankruptcy.
5. When the loan matures
You will also want to consider when you will need to start making payments on this loan.
Many private student loans offer flexible payment options. Most offer the option of deferring student loan payments while you’re still enrolled in college. Student lender Ascent, for example, allows students enrolled at least half-time to defer repayment for up to 60 months.
Personal loans, on the other hand, won’t have the same options for deferring payments while you’re still in school. Most lenders will ask you to start repaying your personal loan a few weeks after the payment.
6. If you can cancel interest payments
Finally, private student loans offer the ability to forgive student debt interest payments – a benefit that can reduce taxable income by up to $2,500.
But the loan must meet certain eligibility requirements for the student loan interest deduction to apply.
And while most private student loans meet these requirements, personal loans generally do not.
Choosing between a personal loan and a private student loan
Understanding the differences between private student loans and personal loans will help you make an informed decision as to which is best for your situation.
If you need to fund education or college-related expenses or refinance student debt, consider a private student loan. Lower interest rates and a wider range of options on private student loans can make them a flexible way to fund tuition.
But if you’re looking for more control over how and where to use loan funds, a personal loan might be the best option. This type of loan can fill financial gaps and help pay for non-university fees.
For example, you might need funds to pay for a coding bootcamp or similar training program. Or as a student, you might find yourself with a bill for a major medical or dental procedure while you’re in college.
Once you have decided on the type of loan that is right for you, your homework is not done. Be sure to shop around and compare offers to find lenders who can offer you an affordable loan that meets your needs.