What Are the Risks of Private Loans?

What Are the Risks of Private Loans?

Private loans and federal loans are often used to pay for college, and when choosing what loans to take out, many people are unsure about which type they should use. Looking at the risks of using private loans may help with this decision. However, if you have questions related to bankruptcy, then consider asking a Tullahoma bankruptcy attorney for help.


What makes private loans stand out from other loans is the fact that private loans are not regulated by the government. This means all the benefits and securities that would normally be offered might not be with private loans. The government cannot protect borrowers of private loans.

Private loans work by basing the interest rate and fees on credit history. The better your credit score, the better terms you will be offered. Lower interest rates and fees are the most common benefit of a good credit score.

Unlike federal loans, private loans do not offer the same benefits of deferment and forbearance. This means when you are expected to pay back the loan, you may have fewer options when you cannot pay the loan right away. However, these benefits may differ depending on the private loan lender you go through.

Some private loan lenders may even offer better benefits like cancellations. Researching what different private loan lenders have to offer can become highly beneficial. Do not hesitate to find out more information before choosing a private loan. You can ask questions and find out exactly what the terms and benefits will be.


With some of the risks of using private loans, many people wonder whether they should choose federal or private loans. Comparing federal loans to private loans can help with this decision. Federal loans are backed by the government, offer more benefits, and tend to have a wider range of repayment options.

The benefits of federal loans are lower interest rates, flexible repayment options, and not having to worry about your credit score. Since these loans go through the government, your credit score is not required to obtain a federal loan. However, if a parent is applying for a Parent PLUS loan, then the credit score of the parent could be used.

A major benefit of federal loans is that the interest rates are fixed. Variable interest rates with other loans mean the interest rate could unexpectedly increase. Remember that when comparing private loans versus federal loans, the negatives of private loans can be summed up as:

  • Repayment could start while you are in school
  • Fewer repayment options
  • No loan forgiveness programs
  • No subsidizing for private loans
  • Higher interest rates

The benefits of private loans are more common when you have a good credit score which may result in lower interest rates.


Bankruptcy is often an intimidating option to consider when trying to overcome a serious financial dilemma. Feel free to call us at Tom Bible Law today at (423) 690-7712 for a consultation about bankruptcy options. Our Tennessee bankruptcy lawyers might be able to help you escape your financial situation. We serve clients throughout the Tennessee cities of Chattanooga and Tullahoma.

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