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

Posted on July 4, 2010 

There is a lot of debate around the issue of secure vs. unsecured loans. Students (of course) suffer a lot more for many reasons- age, a lack of income, and a lack of a credit history.

The choice of what to get can already be overwhelming for the regular borrow, imagine how crazy complicated it feels to the average student who is not fully educated on secure and unsecured loans? The notice can definitely be seen when investigating deeper into each one of these offers. Since you probably haven’t researched into them, I did it for you.

So what is there to look out for in a nutshell?

On one side, there’s the matter of lower interest rates on secured loans – since the lender feels there isn’t as big of a risk involved. On the other hand there is less risk and more convenience for the borrower when it comes to unsecured personal loans and 500 dollar loans. Then (as always) there’s the matter of credit history, which may make unsecured loans inaccessible for some, or make the interest rate too high.

The average student, who is worrying about dealing with college, has absolutely no way of proving a steady income- especially if they’re slangin burgers as a waitress or a mixologist bartender- and because of this, has no way to prove their ability to pay back those dreaded loans. If this is the case, a parent is usually involved in the transaction – whether it be in a supporting role, or providing security. The non-existence of any credit history also tends to translate in to a perception of a higher risk, which again translates into higher interest rates.

Pretty much, any security offered by a parent puts that item at risk. If the student fails to meet the payments, the parent has to foot the bill – or risk losing the item offered to secure the loan. But! 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 that are manageable. For the burger slanger.

One of the greatest features of unsecured personal loans is that they 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.

There’s another factor you need to realize when it comes down to something like 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 unfortunately 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 really just depends on your particular situation, and how much stuff you want to lose. What is the possibility of dropping out of school? What are the possibilities (probably really high) of not finding a job after you graduate? If any of these should happen, would your parents be able too carry any repayments for a loan that he or she offered to provide security for? Are they going to hate you forever if they can’t?

If there is even a smidgen of risk floating around out there, it would probably be better to look into unsecured personal loans. At least this way, you won’t be putting your parents at risk for losing an asset that took years to obtain, and which might not be possible to replace after damage to his or her credit record. And I know I stated this as a question previously, but if this were to happen… they would probably hate you.

Photo Credit: “Loans” by Omar Omar


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