Guide to personal loans for students
Chances are you’re probably strapped for cash if you’re at university. Not only is it usually your first time living away from home, but you’ll likely only have a small income from a part-time job so you can keep up with your studies.
An option you may want to consider is a personal loan. This is different to the one you receive from the Student Loans Company (SLC), which covers your tuition fees and pays towards your maintenance costs.
A personal loan can be helpful, if used responsibly, for larger expenses. For instance, if you’re doing a year in industry and need a car to get to your placement.
- You’ll need to demonstrate that you can afford the monthly repayments with a steady income
- Interest rates tend to be high as students are viewed as more of a risk to lenders
- Consider building up your credit score first so you can access lower rates
Can I get a personal loan if I’m a student?
If you find that you’re still in need of money after receiving your maintenance loan from SLC, it’s possible to get a personal loan.
Your options will be limited and the interest rates you’re offered will likely be high though. This is because loan providers assess the risk of you defaulting on your payments to determine the terms and conditions of the loan.
As a student, you’re more likely to have a lower income and may be yet to build up a credit score. These are red flags to the lender, who will compensate by increasing the interest rate, if they offer you a loan at all.
How much can a student borrow?
Generally, the most you can borrow on a personal loan is £25,000, but such a large amount won’t be available to everyone.
The loan amount will be dependent on a few different factors, like your income, credit score and any other existing debts that you’re currently repaying. These are all considered in the lender’s affordability check when you apply, which assesses whether you’d be able to comfortably make your monthly repayments.
What types of loans are available for students?
There are a few different types of loans you may want to consider as a student:
A bank or financial institution loans you an amount, in return you must adhere to a monthly repayment schedule and pay off the debt by a certain date. You’ll be charged a high interest rate
A family member or close friend agrees to pay off the debt on your behalf if you fail to make your repayments. You may be able to access larger loan amounts, but again your interest rate will be high, and it could cause strain on the relationship between you and the guarantor if you start to fall behind on your payments
This is financial help from the government to help fund your time at university. There’s a tuition loan to cover the cost of your course and a maintenance loan (paid in three instalments), which goes towards your living expenses. You only need to start paying this back when you earn over a certain threshold
Similar to student finance but helps fund a Master’s course. Again, you’ll only start to repay it when you earn over a certain amount
These types of loans use your home or car (sometimes even jewellery) as security. So, if you’re unable to repay the debt, the lender can sell the asset and recoup their money. This can be extremely risky, but you may have access to lower interest rates and longer terms than on other types of loans. You’ll need to own the asset to use it as collateral
Also known as payday loans. They have a bad rep for a reason. The interest rates tend to be extremely high, and you can find yourself stuck in a cycle of debt that’s really hard to get out of. It’s an expensive way to borrow and there’s plenty of other options to consider first
What’s the difference between a student loan and a personal loan for a student?
A student loan is provided by the government to those enrolled in higher education. The SLC which administers the loan will need confirmation that you’ve been accepted at university before releasing the funds.
There are two parts to a student loan:
Tuition fee loan – Paid directly to the university to cover your tuition fees
Maintenance loan – Deposited into your bank account to help pay for costs associated with living away from home, for instance rent and food shopping. The amount you receive will depend on how much your household earns per year
You’ll only start repaying the loan when you earn over a certain amount and the repayments will stop if your salary dips below that threshold at any point. There’s no set loan term and your employer will usually be responsible for sorting out the repayments from your wages.
A personal loan for students works very differently.
Banks, building societies and financial institutions administer these types of loans, rather than the government.
If your application is successful, the loan agreement will set out the terms and conditions you must adhere to. This will include:
- Loan amount – How much the loan is for
- Loan term – When you must pay the entire loan back by
- Repayment schedule – How much your monthly repayments will be and when they’re due
- Interest rate – How much you’ll be charged for borrowing the money as a percentage
Another difference is that you’re required to repay the loan each month no matter what you earn. Skipping a repayment can have a negative effect on your credit score, which will have an impact on your future ability to access credit.
Is there a minimum age?
You’ll be required to be aged over 18 to be considered for a personal loan.
What can I use a personal student loan for?
The lender will want to know what you’re using the loan for, however there’s usually not a huge number of limitations. Using the loan to fund a house deposit, gamble or to loan to someone else, could see your application get rejected though.
A loan shouldn’t be used for everyday purchases as it can be an expensive way to borrow, but you may want to use one for larger expenses, like buying a car or laptop.
What to look for?
The first thing you should be looking at is the cost of the loan. This is the most important thing to consider.
Look at both the monthly repayments and the overall amount you’ll end up paying back. You want to choose the cheapest option.
Remember that the longer the loan term, the more expensive the loan will ultimately be.
You’ll also want to watch out for any early repayment charges. It’s important to weigh up whether paying off your loan before the term ends will save you any money once you’ve taken these fees into account.
Use our loan calculator to find out the total cost of a loan and determine how much you can realistically afford to repay each month.
What credit score do I need?
A personal loan usually requires you to have a good credit score, but each lender will have their own criteria. There are specialist lenders who will provide loans for those with lower credit scores.
To access the best interest rates, you’ll need an excellent credit score, but you’re unlikely to have one if you haven’t successfully managed credit in the past.
Before applying, use our smart search to find the loans that you’re more likely to be accepted for. This is done by performing a soft search on your credit report to match you with loans you’re eligible for. There’ll be no impact on your credit rating whatsoever.
How to improve your credit rating
There are a few different ways to improve your credit score. Try:
- Registering on the electoral roll – This can help to prove your address
- Check your credit report – Make sure that all the details contained on it are correct
- Build up your credit history – You may want to think about taking out a credit card, spending a small amount and paying off the debt in full each month. This will demonstrate that you can borrow responsibly
- Only use a small amount of your credit allowance – If you have a credit card, try to only use up to 30% of the credit limit
- Pay your bills on time – Try not to default on payments as your credit score could take a hit. You want to build a reputation as a reliable borrower
- Avoid applying for credit close together – Multiple applications for credit close together can make it look like you’re struggling to lenders
Funding a business idea as a student?
There are hundreds of government funding schemes for small businesses and start-ups, it’s just a case of finding the right one for you.
You could also access a loan through the Prince’s Trust to start your business. They work with the Start Up Loans Company enabling young people to access low interest loans to help get their company off the ground.
Things to consider before taking out a personal loan?
Consider whether it’s really necessary to take out a loan, or if there are other options to consider.
Loan costs can easily get out of hand if your financial circumstances change, for instance if your rent or utility bills increase unexpectedly. This could leave you unable to make your monthly repayments and debt can easily spiral.
If you can access one, you may want to think about a 0% purchase credit card. This will enable you to spend for a certain amount of time without paying any interest. All you need to do is make your minimum monthly repayments (at the very least) to keep the introductory offer and pay off the balance before it ends.
Alternatively, you could use a 0% overdraft on your current account. You’ll want to make sure this is paid off before you finish studying to avoid being charged though.
What to do if you’re struggling
It’s important to speak up if you’re struggling. There’s no shame in finding yourself in debt, it can happen to anyone.
The first thing you’ll need to do is speak to your lender before you start to default on any payments. They may be able to arrange a repayment holiday or alter your payment schedule. Although these options will ease the financial pressure, be aware that you’ll likely end up paying more interest over the loan term.