How to Choose the Best Loan Company for You

Written by: Matt Kuncaitis
Updated: 4/30/21

A loan can give you the financial means to accomplish important life goals, like graduating from college. If you’re new to the world of lending, taking out your first loan can be daunting. There are many details to consider, from terms to interest rates. Plus, there are many different companies to choose from, which can make the process even more overwhelming.

Don’t worry, though; all the information you need to make a smart decision when choosing a lender is available. You just have to do a bit of research. This guide provides an introduction to some top lenders and is designed to help you choose the best loan company for you.

Understand How a Student Loan Works

The first step to choosing the right student loan option to suit your needs is understanding how student loans work. Let’s start with the basics: A student loan involves borrowing money from a private or governmental lender to pay for college.

Educational loans are unique from other types of lending, like home improvement loans, small business loans, and auto loans. The loan purpose impacts what lending opportunities are available to you. As a student, you may use your loan to cover everything from tuition to room and board, books, and living costs.

Here’s a quick rundown of the process of taking out a new loan:

  • Do some research on different lenders. Different loan providers will provide different conditions, like repayment term lengths, high versus low interest rates, and principals. Compare your personal loan rates.
  • Complete the loan application, applying directly to the lender.
  • Once you get loan approval, you will sign a promissory note upfront. This is a legally binding document in which you state that you agree to repay the loan plus interest.
  • In most cases, you’ll start making monthly payments while studying. You will pay a set amount each month, agreed upon with the lender. This is a combination of the principal plus interest (here’s a primer to paying principal versus interest).
  • Down the line, it might be possible to refinance loans with a private lender to get lower interest rates or seek consolidation loans with the government.

That’s a basic breakdown of how student loans work, although the details depend on the loan you take out (e.g., federal versus private). The next section discusses the difference.

Federal Student Loans vs. Private Student Loans

There are two main categories of student loans: federal student loans and private student loans.

Federal student loans are issued by the U.S. government. There are three main types. Direct Subsidized Loans are usually for undergraduates who demonstrate financial need. Direct Unsubsidized Loans can be for undergraduate or graduate students and don’t require that you demonstrate financial need. Finally, there are Direct PLUS Loans. These can be taken out by the parents of dependent graduate students or by graduate students themselves. 

Private student loans might be issued by credit unions, state agencies, banks, financial institutions, or schools. Here’s how they’re different:

  • Depending on your credit score or the credit score of your co-signer, you may be able to get a lower interest rate with a private student loan than a federal student loan.
  • With private student loans, the borrower must cover all interest payments. This isn’t always the case for federal student loans. With Direct Subsidized Loans, for example, the government pays interest until you start paying the loan back.
  • Repayment terms on federal student loans are much more flexible than on private student loans.

In short, federal student loan options tend to offer more flexibility. You should always check your federal student loan options before exploring private student loans.

Review Your Loan Qualifications Before Applying

When shopping around for student loans, you will compare points like payment terms and loan rates. It’s also important to consider your financial consumer profile when applying for loans, as not everyone can get a loan. Lenders will review key details about the borrower (e.g., debt-to-income ratio) to determine eligibility.

Below, we detail some of the most common qualifications that lenders look at.

Credit Score

Your credit score is a number from 300 to 850 that tells lenders how likely you are to pay back the money you owe on time. This figure is based on your financial history and takes into account everything from unpaid credit cards to whether you pay utility bills on time. The credit score model was established by the Fair Isaac Corporation and is called the FICO score.

Here’s a quick rundown of credit scores:

  • Excellent Credit: 800 to 850
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 300 to 579

If you have bad credit and don’t have a lot of money in your bank account to pay back outstanding debts, there are steps you can take to improve your FICO score. Read our guide on credit requirements and how to improve bad credit here.

Payment History

Your payment history for loans and credit cards is one significant factor impacting your credit score. Since a credit score is based on a cumulative history, younger people tend not to have a great score. This isn’t because you’ve done anything wrong; it’s just that there’s limited or no data available to demonstrate to banks that you might be a reliable borrower. Better credit equals more competitive rates.

To find out where you stand, you can get a free copy of your credit report. The Federal Trade Commission’s (FTC) Fair Credit Reporting Act (FCRA) protects your right to obtain one free copy of your credit report once per year through AnnualCreditReport.com. You can get one copy from each of the three main credit bureaus: Experian, TransUnion, and Equifax. However, due to the coronavirus pandemic, the major credit bureaus are offering free weekly reports until April 2021.

Income

In addition to your creditworthiness, your income is also a factor to consider when choosing, qualifying, and applying for a student loan. Having a steady stream of income increases the likelihood that you will be able to make the monthly payments required on the life of the loan. Remember, barring some federal student loans, most lenders require you to start paying at least part of your principal and interest while studying.

What Is the Best Loan Company?

Above, we talked about the factors that will allow you to qualify for a student loan. As mentioned, your unique needs and profile as a financial consumer will help determine which loan option is best for you. Factors to consider when assessing a loan company include interest rates (fixed interest rates versus variable interest rates), terms, and flexibility of repayment options.

Below, we break down some of the options you have when choosing a lender.

Sallie Mae

Sallie Mae offers private student loans designed to cover diverse needs. Variable rate annual percentage rates (APRs) range from 1.25% to 11.35%, while fixed rate APRs range from 4.25% to 12.59%. Repayment terms range from five to 15 years.

Here are some of the highlights:

  • Repayment options during school include deferred or interest-only options, saving you money on immediate payments.
  • Sallie Mae covers diverse types of learning, including remote studies.
  • The Chegg Study option provides up to four months of study help for undergraduates.
  • There are no origination or application fees.

Who does this loan make the most sense for? If you have a co-signer. Students are almost four times more likely to get approved for a Sallie Mae loan with a co-signer (like a parent). This will also help you get a better rate.

College Ave

College Ave provides variable rate APRs of 1.04% to 11.98% and fixed rate APRs of 3.34% to 12.99%. Repayment terms likewise range from five to 15 years.

Here are some of the highlights:

  • Deferred payments are possible. You can also opt for a $25 flat monthly payment.
  • When you apply, they check your qualifications with a soft credit pull, which doesn’t negatively impact your credit score (unlike a hard check).
  • You can get a 0.25% rate reduction if you sign up to have payments auto-debited.

Who does this loan make the most sense for? If you value simplicity. Sign up to auto-debit payments and you’ll save money and won’t have to even think about your loan payments, allowing you to focus on your studies.

Earnest

Earnest offers variable rate APRs from 1.05% to 11.44% and fixed rate APRs from 3.49% to 12.78%. You can customize the monthly repayment and length of the loan.

Here are some of the highlights:

  • Multiple in-school repayment options are available.
  • You get a nine-month grace period before you have to start paying, which is well above the average.
  • You can skip one payment per year. 
  • There are no late fees, prepayment penalties, or origination fees.

Who does this loan make the most sense for? If you have an uncertain financial future. If you don’t have a steady income stream lined up yet and aren’t sure what your plans are after school, it’s great to have liberties like a nine-month grace period and skipping one payment per year.

Custom Choice

Custom Choice offers variable rate APRs from 1.03% to 9.53% and fixed rate APRs from 3.99% to 10.56%. They offer flexible loan terms of seven, 10, or 15 years.

Here are some of the highlights:

  • Loans may cover up to 100% of the cost of attendance, including lab fees, books, room and board, and computers.
  • There’s an easy release of your co-signer.
  • There are support programs in case of natural disasters or job loss (no fees for missed or late payments).

Who does this loan make the most sense for? If you have a clear-cut career path after school. If you have a low credit rate now, you can have a parent co-sign the loan. Once you get your own income stream, you can easily release your parent as a co-signer.

Discover

Discover offers variable rate APRs of 1.24% to 11.99% and fixed rate APRs of 4.24% to 12.99%. You have one loan repayment term option of 15 years.

Here are some of the highlights:

  • There’s multi-year approval and perks like “good grade” awards.
  • Diverse payment options are available.
  • There are no late fees.

Who does this loan make the most sense for? If you’re willing to take a long repayment term. Discover only offers 15-year repayment terms. If you’re hoping for something shorter, keep looking. The good part about a long repayment time frame is that you pay less per month than you would if you had a shorter time frame.

Union Federal

Union Federal offers fixed rate APRs from 3.99% to 10.56% and variable rate APRs from 1.03% to 9.53%. Terms range from seven to 15 years.

Here are some of the highlights:

  • Deferment or forbearance is possible.
  • Co-signer release is available.
  • You have diverse repayment options, including immediate, interest-only, fixed, and deferred.
  • There’s an easy rate quote and prequalification process without negatively impacting your credit score.
  • There are no application, late, or origination fees.

Who does this loan make the most sense for? If you’re an international student. Not all loans are open to non-U.S. residents. Union Federal does accept applications from international students, provided they have a co-signer.

CommonBond

CommonBond offers variable rate APRs of 3.81% to 9.37% and fixed rate APRs of 3.74% to 10.74%. Terms are five, 10, or 15 years.

Here are some of the highlights:

  • Deferment and forbearance options are available.
  • Co-signer release is possible.
  • There are no application or origination fees.
  • Get real offers with a soft credit check for the application process.
  • Take advantage of money mentor services at no added cost.
  • CommonBond is defined by a social mission.

Who does this loan make the most sense for? If you don’t have a clue about finances. CommonBond stands out for its “Money Mentor” service, which can help you get a handle on your student loans and finances in general.

Keep in mind that you’ll need a good credit score (a minimum credit score of 660) to qualify.

Ascent

Ascent provides a fixed APR of 3.38% to 14.50% and variable APR of 2.44% to 12.96%. Terms range from five to 15 years.

Here are some of the highlights:

  • Options are available with or without a co-signer.
  • There are no origination fees or application fees.
  • There is no prepayment penalty.
  • Generous forbearance is possible.
  • You can qualify even if you don’t have a credit history or co-signer.

Who does this loan make the most sense for? Ifyou don’t have a credit history. As mentioned, young people generally have limited or no credit history. Ascent will still provide you with a student loan even without this information.

Funding U

Funding U offers fixed rate APRs of 7.99% to 13.49%. No variable rate APRs are available.

Here are some of the highlights:

  • No credit history or co-signer is needed.
  • DACA students with a Social Security number that makes them eligible to work can qualify.
  • There’s a soft credit check to confirm qualification.
  • There’s an autopay discount of 0.5%.

Who does this loan make the most sense for? DACA students can qualify for this loan. Funding U doesn’t ask for a co-signer, which can benefit students whose parents are not U.S. citizens.

LendKey

LendKey offers fixed rate APRs of 2.95% to 7.63% and variable rate APRs of 1.91% to 5.25% with autopay. Terms can be up to 15 or even 20 years.

Here are some of the highlights:

  • LendKey provides a generous 18 months of forbearance.
  • This is a smaller lender, which can sometimes allow for better rates.
  • Deferment options are limited.
  • Longer-than-average terms of up to 20 years are possible.
  • There’s a soft credit check.

Who does this loan make the most sense for? If you don’t need more than $125,000. LendKey has a maximum loan amount of $125,000, making this smaller lender ideal if you don’t need more than that amount. There is also a minimum loan amount of $5,000.

SoFi

SoFi offers variable rate APRs of 1.87% to 11.66% and fixed rate APRs of 4.23% to 11.26%. Terms available include five, 10, and 15 years.

Here are some of the highlights:

  • There is a six-month grace period for deferred repayment plans.
  • SoFi has a reputation for good customer service.
  • No hard credit check is needed to get your loan offer.
  • There’s no minimum income requirement.
  • There are no application, late, or origination fees.

Who does this loan make the most sense for? If you are working your way through school and can start paying immediately. Deferred payment options are limited to graduate students and military service members. You only get the grace period for deferred payment plans. 

CollegeFinance.com Can Help You Find the Best Loan Company for You

Every borrower’s needs are different. The best personal loan for you won’t necessarily be the best one for your friend.

Set aside a business day to review various personal loan lenders, factoring in both the loan and your personal profile as a financial consumer. Always read the fine print, including any disclaimers, FAQ, and online lender reviews. With some effort, you will find the funding option that is right for you. It doesn’t have to be difficult. It just takes some time.

CollegeFinance.com is dedicated to giving students the information they need to make smart choices about education funding. Our resources cover everything from debt consolidation to refinancing student loans, dealing with credit card debt, handling payments amid COVID-19, and more.