Unsecured vs. Secured Loans – What is best for Students?

There is a lot of debate around the issue of unsecured vs. secured loans. Students face even more complex issues – due to age, a lack of income, and a lack of a credit history.

Secured Loans are Riskier for the Students but More Accessible

For the average person, the choice is already complex. On the one hand there is the matter of lower interest rates on secured loans – since the lender feels there is less of a risk involved. On the other hand there is a lesser risk and more convenience for the borrower when it comes to unsecured personal loans. Then there is the matter of credit history, which may make unsecured loans inaccessible for some, or cause the interest rate to be too high.

The average student has no way of proving a stable income, and as such the ability to pay back any loan. As such, a parent is usually involved in the transaction – whether it be in a supporting role, or providing security. The total absence of any credit history also tends to translate in to a perception of a higher risk, which again translates into higher interest rates.

The Effect on Parents’ Assets

As such, any security offered by a parent puts that item at risk. In the event of the student failing to meet the payments, the parent has to foot the bill – or risk losing the item offered to secure the loan. However, if a home equity loan was obtained, it would mean that the repayments can be spread over a longer period, at a lower interest rate – resulting in much lower monthly repayments.

On the other hand, unsecured personal loans pose less of a threat to personal assets. While the higher risk is likely to result in a higher interest rate being charged, there is little risk of losing any assets.

The Effect on a Car Purchase

Another factor also comes into play when it comes to purchasing a vehicle. Financing the vehicle would demand insurance acceptable to the lender – which, in the case of a student, is likely to be really expensive. Depending on the car (which is usually a small second hand car), it is possible that the monthly insurance costs may exceed the installment. In such cases, it is better to consider unsecured loans, and simply obtain liability insurance. This option is, for many students at least, the only affordable one.

At the end of the day, the choice between a secured vs. unsecured loans depends on your specific situation. What is the possibility of dropping out, or not being able to find work after qualifying? If any of these should happen, would the parent be able to carry any repayments for a loan that he or she offered to provide security for?

If there is any such risk, it would probably be better to pursue unsecured personal loans. In that case, at least there is no risk of a parent losing an asset that took years to obtain, and which might not be possible to replace after damage to his or her credit record.