Pros and Cons of Bank-based Student Loans

Because of the increasing cost of education, specially for higher degrees, students are in search for sources of financial assistance. While the federal and provincial or territorial governments of Canada have student loan programs, obtaining such loans are becoming more difficult.

That is why student loans from banks are a welcome option for many students and their parents. Banks are ready to extend loans to eligible individuals and they assure borrowers that funds will be available when needed.

Pros of bank-based student loans

Student loans from banks are allowed even for individuals studying abroad.

Many banks provide a financial advisor or credit specialist to assist the potential borrower in determining the credit limit that is to be extended annually. Unlike the lump sum loan that is extended by the government, a bank student loan is released on periodic periods and the outstanding loan amount will depend on the financial need for that particular period.

In effect, the borrower has a revolving credit line that can be borrowed entirely or partially at any time and can be reused after payment has been made.

There is no cost to the student-borrower or his parent-borrower until it is used.

Cons of bank-based student loans

While the bank-based student loan seems to be easy to avail of, the downside to such loans is the interest. Bank interest rates are higher than those of the government.

The interest on a bank loan is computed monthly and will need to be paid monthly, unlike a government loan where interest is computed and paid only after the student has graduated from his or her degree. Payment on the loan principal will start a month after availment compared to the government loan’s six-month grace period after graduation.

In case of failure to pay what is due, the bank is more stringent and levies penalties compared to the government’s more considerate loan restructuring terms. And unlike the government loan, the bank may require a guarantor.

On a long-term basis, if the borrower is a good payer, a bank loan establishes the borrower’s credit rating for future transactions.

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