While federal loans are not credit-qualified loans, private student loans are determined based on your credit history. Many students do not qualify for private student loans on their own because they do not have an extensive credit history. Those with bad credit may also need to have a qualified cosigner to be approved for a loan. Private student loans require a credit application that examines income, employment, and a credit report.
How Bad Credit May Affect Your Student Loan:
- Higher Interest Rate
- May Need a Co-signer
- May be Denied to a Loan
Private student loans are credit-qualified loans that use the risk-based lending method. The lower your credit score is, the higher the risk for the lender, therefore they charge a higher interest rate on loans with bad credit. One way to get a lower rate may be to have a cosigner on your loans with better credit. Your lender may require that you add a cosigner anyhow to balance out their risk on the loan. Unfortunately, some private student loans may be denied due to bad credit, even if one lender will not grant you a loan another may. Apply with various lenders to see who will give you the best loan and interest rate given your current credit standing.
How to Repair Your Credit
If you find yourself borrowing private student loans with bad credit there are a few ways that you can remedy the situation. First and foremost you will need to clean up your credit. Here are 5 ways to improve your credit score.
- Pay off any collections or outstanding defaulted debts.
- Pay all of your current bills on time moving forward.
- Pay down your balances on your debt in relation to how much credit is available.
- Avoid any inquiries to your credit report for new debt.
- Give it time, your credit will take some time to improve.
After your credit has improved you should consider refinancing your student loans. You will likely qualify for a lower rate and save a lot of money overall. It is possible to obtain student loans with bad credit and in time you can refinance your loans to lower rates.