Often students may want to consider additional funds for their education by the way of private loans. Unlike government loans, the terms of a private loan are dependent upon credit history. For many students, and first time borrowers, their credit histories may not be very extensive.
In fact, most students may not have any credit history at all; however, having no credit is better than having a bad credit history. In these situations, the lending institution may require a co-signor to guarantee the loan. Co-signors are entering into the loan agreement, and they have an equal responsibility to making sure the loan is paid in full if the primary borrower misses payments or defaults entirely on the loan.
However, one of the benefits of a co-signor is lower interest rates based on their good credit history. Students, more often than not, have little or no credit history, and to financial institutions, they are seen as high, or higher risk borrowers than someone with an established credit history. That being said, when “shopping around” for a co-signor, the one thing to look for is the person with the best credit history. Also, some financial institutions will “release” the co-signor after two consecutive years of proper payment on the loan. In this way, the student can work to improve their credit history while having the added benefit of lower interest rates that were established by their co-signor.
Conversely, acquiring a private student loan without a co-signor could result in very high interest rates, leading the student to pay much more money than was initially borrowed. Additionally, it may be very difficult to procure a private loan with very limited credit history, and students may find themselves with a less than desirable loan term.
This being said, if you are a student looking for a private student loan to either augment your current financial aid, or to replace the need for federal loans, obtaining a co-signor is the best bet for low interest rates, and a desirable loan term. Obtaining a co-signor with the best credit history possible will ensure the lowest interest rates and best loan term for the borrower. With better interest rates, students are more able to repay this loan, and therefore, they start building a good credit history for themselves.