Millions of American families use student loans to cover the cost of college and graduate school. Although student loans are accessible and a normal part of life, it’s important to understand their impact on your finances.
Different types of debt have different rates and overall impacts on your life if you fail to pay them back. The main types of debt, secured and unsecured, are defined by what the lender can reclaim if the loan holder fails to make payments.
Failing to make any payments on your debts can still impact your credit score. However, missing a student loan payment won’t result in an immediate catastrophe, and the lender won’t be able to directly go after your car or home. Here are the basics to understanding student loans and their role as a form of unsecured debt.
What is a Secured Debt?
A secured debt is backed by collateral, such as goods or money. Basic forms of secured debt include common investments like mortgages and auto loans, which can be repossessed or foreclosed if the debt is not repaid. This can also include loans or credit cards secured by a savings account, such as secured loans designed to improve the account holder’s credit score.
Unsecured debts do not have any collateral backing them. Unsecured debts include most basic credit and everyday debt, such as medical bills and unsecured credit cards. If you fail to repay them, the bank or creditor does not have any method of recourse for collecting them other than sending them to a collections agency and garnishing your wages.
Why Student Loans are Different
Student loans are an investment in your education. The money from the student loans can be used for tuition, books, and even living expenses. Because of this, the money is usually non-refundable and has no tangible item associated with it once it is spent.
This means that student loans are inherently higher risk for lenders. Instead of repossessing a car or foreclosing on a home, they have to send debt collection agencies after you if you don’t pay. In many cases, it takes lenders years to collect overdue payments if the borrower fails to make payments.
Even if you have excellent credit and a co-signer, your loans are still considered unsecured.
What this Means for Your Loans
Your student loans, car loans, and home loans will be subject to different rates. Typically, student rates will have higher interest rates because the lender has to charge a little more than they might for secured loans, both in fees and interest, to cover the potential costs associated with you defaulting.
Student loans, along with other types of personal loans, also usually have shorter repayment terms. Each subtype of unsecured loans has slightly different terms that vary from lender to lender. Your terms also depend on your credit score and variables like having a co-signer.
Failure to pay either an unsecured or secured loan back will be reported to the credit bureaus, which can negatively impact your credit score. Although adverse events on your credit report will typically drop off your credit report in 7 years, the long-term effect on your credit score could affect your ability to qualify for additional loans and mortgages.
Getting the Best Student Loans Possible
To get the best student loan rates possible, look for a nonprofit credit union to help you finance your education. Unlike traditional banks, credit unions are designed to serve their members without making a profit. This means they can offer lower rates and can work with members who don’t have ideal credit scores.
T&I Credit Union is proud to provide a variety of secured and unsecured loans. In addition to student loans, we provide car loans, home equity loans, holiday and wedding loans, and much more. Our knowledgeable loan officers will work with you to provide a loan package that helps you reach your goals.
We serve a 7-county area around Detroit and live in the community we serve. Contact us today at (248)-397-9571 to talk to a team member about membership options. We’ll be here to support you through college, buying your first home, and much more.