If you don't have a good credit score, banks generally won't approve you for a loan. That holds true for student loans to an extent. Depending on what type of student loan you apply for, such as public or private, your credit score may not have any bearing whatsoever on your chances of getting approved.
Public Loans
Public student loans are backed by the federal government and include loans such as PLUS, Stafford and Perkins Loans. According to studentloans.gov, debt-to-income ratio, credit score and employment history have absolutely no effect on your loan application. Failure to repay the student loan, however, will result in a hit to your credit score. Public student loans and the amount of the loan are awarded based on either your finances or your parent's finances. Higher loan amounts are generally given to low-income families.
Private Loans
Private student loans are loans granted through a bank or financial institution. As with all types of borrowing through banks, your credit score is taken into account when you apply for a student loan. A poor credit score, which is usually regarded as anything below 620, will either result in the financial institution denying you the loan or giving you a higher interest rate. Student loans typically start out at higher interest rates than public loans. For example, a private loan usually starts out at a base interest rate plus the Wall Street Journal Prime rate, which fluctuates. The base rate depends on your credit score and could be as high as 7 percent or higher plus the Prime Rate. Public loans are flat rates. For example, a subsidized Stafford loan comes with an interest rate of 4.50 percent or an unsubsidized rate of 6.80 percent in 2011.
Cosigner or Collateral
If you have a poor credit score, you may be able to secure a private loan with either a cosigner or collateral. If you choose to have a cosigner, the cosigner must have good to excellent credit, which is normally anything from 620 to 720 or above. The closer the cosigner's credit score is to 720, the easier time a bank will have approving your loan. Collateral may or may not be an option, depending on what kind of collateral you have to put up. For example, using a $1,000 valued car as collateral for a $20,000 loan isn't going to get you very far. A house, on the other hand, will almost always secure the loan. If you don't pay the loan back, you stand to lose whatever you put up as collateral.
Choosing the Loan
Always try to secure a public student loan before you apply for a private loan. Public loans are always the better choice if you will receive the same or similar funding amount. If you find that the public student loan does not grant you enough funds, you can then apply for a private loan. If you know that you have a poor credit score, explain that to the financial institution and have a cosigner or collateral in mind.
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