Private Loans

True or false – Every time a lender looks at your credit report, your FICO score takes a hit. The answer to this question actually falls somewhere between true and false. “Hard” inquiries into your credit report can have a negative effect depending upon how frequently occur. “Soft” inquiries, on the other hand, do not impact your score in the slightest.

By definition, hard inquiries in the credit world refer to inquiries conducted by lenders after you have asked them to extend you credit. Whether it is for a private student loan or student car loans, nearly every time you apply for credit, the lender checks your credit history to determine if you care capable of managing the debt.

Financial experts advise students seeking private school loans of any sort to apply with caution. This warning serves two purposes. First, when a student initially applies for credit, the inquiry from a lender does not hurt his or her score. However, once a credit report has had more than two inquiries in a 12 to 18 month period, you run the risk of seriously lowering your FICO score. Second, traditional college students (especially freshman and sophomores) have yet to build a solid credit history. If they make the mistake of applying over and over again for credit (that they can’t get because their don’t have a history), they end up damaging their credit even more. While it is unclear just how bad hard inquiries can hurt your credit, some financial experts estimate that a consumer loses six to 12 points per inquiry (outside the two per year theory).

Soft inquiries are also facilitated by lenders seeking to extend you credit. The difference is these creditors check your credit because they are interested in offering you credit. An example of soft credit inquiries would be inquiries administered by lenders of a college student credit card, private loans, and student college loans. Soft inquiries usually pre-qualify a borrower for different types of private loans. When the borrower receives a pre-qualified credit application and opts to submit the application, he or she is most likely subjected to a hard inquiry at the time.

Private Student Loans

The amount of students utilizing private student loans to pay for college expenses is on the rise. In fact, in the past 10 years private student loan usage has gone from practically non-existent to matching federal student loan use by 25 percent. There are several reasons why the use of private loans is one the rise – interest rates is not one of them.

By nature, interest rates for private student loans are higher than any loan offered by the U.S. Department of Education. That is not to say you can’t get a good deal on a private student loan. However, because the Department of Education has school loan programs designed for the advancement of individuals seeking college degrees, they are able to offer interest rates that are far below competitive.

With that said, private student loans are still increasingly popular and a much needed asset to the student loan industry. Private student loan rates currently range from the prime rate (which as of December 2007 was 7.25) to 15 percent and higher.

Because private student loans are granted based on a borrower’s credit, interest rates can be competitive. Someone with excellent credit has a strong possibility of securing a private loan at prime rate. As the credit score goes down, private student loan rates increase. Borrowers who don’t have strong credit, which can sometimes be the case when you are directly out of high school with very little credit history under your belt, a co-signer can be utilized. By having a co-signer, with excellent credit, sign with the primary borrower, the private lender can usually offer a more attractive interest rate.

Even at a higher interest rate, private student loan rates typically beat out student credit card rates that can easily rise into the range of 20 percent. Even if all a borrower needs is money for textbooks, the private loan may be the way to go because of a more competitive rate.

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