Differences Between Government Loans and Private Sector Loans?

A government loan, quite simply, is a loan issued or backed by the government. The government offers loans in three broad categories—small business loans, mortgage loans, and student loans.

Government mortgage loans are typically issued by the Federal Housing Administration (FHA). In addition, the U.S. Department of Veterans Affairs (VA) and the Rural Housing Service (RHS) will guarantee loans for veterans and rural residents respectively. The U.S. Small Business Administration (SBA) issues small business loans. Student loans are backed by the government and available at various banks or through colleges via the Federal Family Education Loan Program (FFELP).

government loans versus private sector loans

Whichever of these three loans you’re pursuing, a government loan has certain advantages. In general, government loans have lower interest rates than private sector loans, and are often more forgiving of less-than-perfect credit. Interest rates on government loans are determined by the government’s set interest rate, rather than on your individual credit rating. Federal loans are also often more flexible regarding repayment options and debt forgiveness. However, they also often have an upper limit on how much you can borrow. For example, student loans cannot exceed $140,000. And you have no flexibility on how you use this money—it must be paid toward tuition.

By contrast, a private sector loan can be acquired from any lending institution. Interest rates are higher, especially if your credit isn’t stellar, but there’s no limit on how much you can borrow. Also, if you take a loan out for college tuition, but have a medical emergency or other unexpected expense, you can use that money however you need to.

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How to Apply for a Government Loan

Applying for a government loan requires a few different steps than applying for a private sector loan. In order to apply for a government loan, you often must meet certain qualifications. For example, the FHA offers loans specifically for first-time homebuyers, buyers purchasing a home that needs extensive work, and buyers purchasing mobile homes or manufactured housing. You must meet these specific requirements in order to qualify for these loans.

government loans versus private loans

In order to apply for a small business loan, you must have already been turned down for a commercial loan. Student loans require you to fill out a Free Application for Federal Student Aid (FAFSA).

As with any loan, you’ll need to provide financial records such as bank statements, W-2’s, and investment and mortgage documents. If applying for a small business loan, it’s highly recommended that you also supply a business plan.

Video: How to Apply for Free Government Grants, Loans & Scholarships

How Has the Current Financial Crisis Changed Government Loans?

The full answer to this question is still unfolding. In order to keep cash flowing through the banks, the Federal government is encouraging banks to restructure mortgages for homeowners who are struggling with their current loans. Coming programs are likely to involve modifications to small business and consumer loans. The Federal Stimulus Package, will put additional programs into play over the next several months, and until these programs are up and running, the full extent of changes and modifications to government loans will remain uncertain.