When you need to borrow money, the U.S. government can be an appealing source of funding. Those loans typically have borrower-friendly features—they’re relatively easy to qualify for, they might have lower rates than you can find with private lenders. But finding out about government loan programs and taking advantage of them can be a challenge.
How Government Loans Work
In many cases, the government does not lend money directly. Instead, private lenders like banks and finance companies provide funding, and the U.S. government guarantees the loan. Put another way, the government promises to repay your lender if you, the borrower, fail to do so.
Government guarantees reduce risk and make lenders more willing to lend at attractive rates. Plus you’re more likely to get approved in situations when you might not otherwise qualify for a loan.
There are several types of loans available, and new programs occasionally come up in response to events like environmental disasters and other crises. The most common loans available with government assistance are:
- Student loans
- Housing loans, including disaster and home improvement loans
- Business loans, including farms and ranches
If you need help paying for school, federal student loans (under the Direct Loan program) are probably your best option. They are easy to qualify for, they have competitive rates, and they offer flexibility when you’re getting on your feet (and when you face financial hardships in life). For example, during periods of unemployment, you might be able to skip your loan payments temporarily. You can also reduce your required loan payment to make it affordable relative to your monthly income.
Common loan programs include:
- Perkins Loans: These loans are the first choice for students based on attractive features, but you might not qualify.
- Stafford Loans: Easy to qualify for, and you might receive interest subsidies.
- PLUS Loans: Parents can borrow substantial amounts, but that means parents will have to repay.
When borrowing for education, it almost always makes the most sense to borrow as much as you can from government programs before you turn to private lenders.
Private lenders might also offer borrower-friendly features, but they’re far less generous than government loans. They often have variable rates, and they’re harder to qualify for (you typically need good credit, a degree in a high-paying field or a cosigner to help you get approved).
Government Loans for Housing
You can debate whether or not owning a home is always the best financial choice, but the federal government encourages homeownership. The justification might be that homeowners have an opportunity to build equity in their homes and improve their standard of living. They are involved in the community, they care about their properties, and they enjoy a sense of control over their living environment.
First-Time Homebuyer Programs
These programs help people get into homeownership. They may be available through federal or local government programs, and some nonprofit organizations assist homebuyers, as well. Features typically include down payment assistance or low-interest rates. However, these programs aren’t a free lunch. Borrowers are typically restricted to certain income brackets, and there might be limits on how much you can profit from an increase in your home’s value.
FHA financing is among the most popular options for borrowers who want to make a small down payment. You can put down as little as 3.5%, and it’s possible to use gifts and concessions to cover closing costs. However, you have to pay an extra insurance premium. Overextended periods of time, that might not work out in your favor. Read more about how FHA loans work.
The mortgage crisis is behind us, but some have still not fully recovered. Additionally, local factors can bring down a home’s value. If you’re unable to refinance (because you’re underwater, for example), there are still several mortgage help programs available.
Several other less-popular loan programs are backed by the government or government agencies. For example, VA loans are available to service members and veterans, and USDA loans offer up to 100% financing for certain borrowers in rural areas.
Home Improvement and Repair
If you own a home in need of repair (or you’d like to buy one), the government is willing to help make your house and neighborhood a clean, safe, well-lit place. FHA 203(k) loans provide funding for the purchase or rehabilitation of a home. After a disaster, the U.S. Small Business Administration (SBA) provides funding for repairs to your primary residence and replace certain belongings. Even though it’s an SBA loan, you do not have to own a business.
In addition to backing loans, the government offers programs that can help you reduce the amount you borrow. Public servants such as law enforcement officers, teachers, firefighters, and EMTs can also benefit from the Good Neighbor Next Door program.
Local governments may also provide programs that help with energy-efficiency upgrades. PACE programs provide money for projects like solar installations, sustainable landscaping, and more.
A rising tide floats all boats: Small businesses create jobs for people in the community, and they create tax revenue for local and federal governments. If you need help starting or growing your venture, evaluate government loan programs first. SBA loans should be your first choice, and they’re available through many local banks and credit unions.
Although the government helps you qualify by guaranteeing loans, you still need to put skin in the game. Be prepared to make a personal guarantee on most business loans you apply for.
The SBA 7(a) small business loan is the most popular loan program, providing up to $5 million. Other loans are available for smaller enterprises. For example, the SBA promotes microloan programs to help small businesses and nonprofits expand.
The federal government does not offer (or guarantee) personal unsecured loans. Loan programs tend to serve a specific purpose like funding your education, starting and growing a business, or promoting safe and well-maintained housing. It’s harder to influence how borrowers spend money with a personal loan, so policies are less likely to encourage that type of debt. Your best options for a personal loan are:
Because there is no government guarantee on a personal loan, you may have a harder time getting approved: You’ll need decent credit and sufficient income to qualify for the loan. If you have trouble getting approved, you might have to pledge collateral or ask somebody to cosign for the loan with you.