Guide to graduate loans
Having some extra money in your bank account can come in useful after university, whether you’re in desperate need of a car or thinking about relocating to start your dream career.
But is a graduate loan the right option?
- You’ll usually need to hold an account with the lender before you’ll be accepted for a graduate loan
- They tend to have lower interest rates than other personal loans
- Missed repayments can affect your ability to borrow in the future
- Consider the alternatives, including 0% overdrafts and 0% credit cards
What is a graduate loan?
A graduate loan is designed for those that have recently finished university. When used sensibly, they could help you find your feet after higher education, especially if you weren’t able to save up while you were studying.
If you’re approved for a loan, you’ll receive a lump sum which you’ll be required to repay in set monthly instalments, with interest, over an agreed term.
Failing to pay off your loan can have serious repercussions on your future ability to borrow, including buying your first house.
What loans are available for graduate students?
It will depend on your circumstances, but you may want to look at:
Personal loans – A graduate loan is a type of personal loan
Secured loans – This type of loan uses an asset as security, for instance your home or car - which you must own. If you default on your payments, they can be repossessed to pay off your debt
Masters loans – You can receive up to £11,836 from the Student Loans Company (SLC) to pay for your course fees or living costs. The loan amount you’ll receive isn’t dependent on your family’s finances. You’ll start paying back your loan when you earn over a certain amount.
How can I fund my Masters degree without student finance?
If you don’t want to take out a Masters loan, you may want to look into:
- Working while at university
- Disabled students’ allowance
- Research councils provide funding for certain areas of study
- Charity funding
- Sponsorship from an employer
What can I use my graduate loan for?
A graduate loan could typically be used for:
- Purchasing a new car
- Setting up a business
- Funding training courses or further education
Although it’s up to you what you spend the money on (within reason – you can’t use it to gamble, for example), it’s important not to take out a loan for a non-essential reason.
A big holiday or shopping spree may seem appealing after three years of university, but a loan is a serious financial product and costs can easily spiral, especially if you start to miss repayments.
It’s best to use one only for necessary expenses and only apply for what you really need, not what would be nice to have.
How do they work?
Graduate loans work the same as other loans, but you’ll be required to hold a graduate current account with the lender before you can take one out.
You decide the loan amount and how long you’ll need to repay it (loan term), this is generally between one and five years.
Just keep in mind that borrowing the lowest amount possible over the shortest time period will keep the costs down. Longer loan terms may make your monthly repayments smaller, but you’ll end up paying more overall.
Once you’ve applied for the loan, the lender will perform eligibility and affordability checks to confirm whether you’ll be accepted or not. This will also enable them to determine the interest rate they’re prepared to offer you.
Loan providers are only required to give the advertised annual percentage rate (APR) to 51% of successful applicants.
Borrowers who are viewed as more of a risk to the lender will be given a higher interest rate. This may be because of a lower salary or a past of missing repayments on other types of credit, like credit cards.
If you’re accepted for the loan, you’ll be required to make your monthly repayments on a certain date for the duration of the loan term until it’s fully repaid.
The interest rates on graduate loans do tend to be lower than standard loans, as the majority of people fresh out of university will be in entry level jobs with a lower salary.
This can help make them more affordable and hopefully minimise the risk of defaulting on payments.
To apply for a graduate loan, you may need to:
- Be over 18
- Be a UK resident
- Have a graduate current account with the lender. There may be a requirement to have held one for a minimum amount of time
- Be employed full time
- Have no county court judgements
You’ll still need to pass the affordability check to be approved for a graduate loan. This is where the lender analyses whether you’d be able to cover the repayments comfortably.
Remember that any failed loan applications will negatively impact your credit score, so always check that you meet the lender’s specific eligibility criteria before applying, as it will differ between lenders.
Before taking out a graduate loan, have a look at the other options available which may provide a cheaper way to borrow:
0% purchase credit cards – These allow you to spend on your card without accruing interest for an introductory period, so essentially it’s free borrowing. Make at least your minimum monthly repayments and repay the whole amount by the time the 0% period ends to take full advantage
Personal loans – Just because it’s a graduate loan and you’re a graduate, doesn’t mean it’s the right option. Compare it against other personal loans to see if you can get a better deal elsewhere
0% overdraft – If your current account has a 0% overdraft consider using it, or you could switch to an account that does have one. It’s really easy to switch and takes just seven days
It may be possible to receive the lump sum on the same day that you’re approved for the loan. This shouldn’t be the reason why you decide to take out a loan though. You may be charged a fee for this.
Repaying the loan
You’ll be required to make monthly repayments until the loan term ends, this will cover the amount you borrowed, as well as the interest.
Certain lenders will allow you to defer your first payment for a couple of months to lower the chance of missed repayments.
You may also be offered the ability to take repayment holidays, usually a set amount within a year. This allows you to take a break from your monthly payment to ease the pressure.
Remember that you must notify the lender when you plan to take one, otherwise you’re just defaulting on a payment.
Also, you’ll still be charged interest during the repayment holiday, so it will add more onto your debt.
What to consider before taking out a graduate loan?
It’s important to think about the big picture.
A graduate loan isn’t free money and it’s vital that you create a budget to see whether making your monthly repayments would be feasible even if your other outgoings were to increase, for instance if your energy bills become more expensive or your car fails its MOT.
Having a contingency plan in place will help you stay in control of your finances.
What should I do if I’m struggling to make the repayments?
Get in touch with your lender as soon as possible, preferably before you miss a payment. They may be able to adjust your payment schedule or arrange a repayment holiday.
Talking about debt may seem embarrassing but it’s really important that you do.
There are people who can help and give you free advice, like StepChange and National Debtline. Their advisers have heard it all before and will talk you through your options, so you can get debt-free as soon as possible. Don’t suffer in silence.