Typically loans are categorized into two types: Secured loans and Unsecured loans. But what about student loans; Are student loans secured or unsecured? The answer is student loans are generally Unsecured Loans, which means there is no need for collateral while taking student loans.
Student loans also further fall into two types Private student loans and Federal student loans. Both these two types of student loans are Unsecured.
Read this article thoroughly to get a piece of detailed information about student loans whether they are secured loans or unsecured loans.
Are Student Loans Secured Or Unsecured
Student loans don’t need collateral for guarantee. Whereas secured loans need collateral. So if you want to take a secured loan for your child’s education expenses, you can borrow a secured loan in the form of a home equity line of credit loan or home equity loan.
There are many students who are eligible for scholarships, so these students can easily keep themselves away from getting student loans.
On the other hand, there are many other students who are not eligible for scholarships, so typically these types of students really need student loans to meet their educational expenditures.
Why Are Student Loans Considered Unsecured?
Student loans are considered unsecured loans because student loans don’t require collateral. When you take out a student loan, you don’t need to pledge any asset or property.
Student loans, credit card loans, personal loans, and medical bills are all considered unsecured loans.
As student loans are unsecured loans, these are riskier than secured loans because there is no attachment of any asset to them.
Lenders compensate for this risk with borrowers credit worthiness and by charging higher interest rates. Individuals with excellent credit history can obtain unsecured loans easily.
What Is a Secured Loan With Example?
A secured loan is a kind of loan that needs collateral means the borrower has to pledge any property against the loan.
The collateral in the secured loan may be a home, car, or any other financial property or equity. The lender will determine the amount of the loan on the basis of the value of the collateral.
Actually secured loans are risk-free loans for the lenders because if the borrowers stop paying the payments, the lender can repossess the collateral to recover their loan amount.
The duration for repossession depends upon your credit report and lasts for about seven years. When the borrowers lend secured loans, their lenders put a lien on collateral.
The lenders remove the lien on the collateral after the complete back payments of the loan amount. There are many types of assets that borrowers can use as collateral for obtaining a secured loan.
These assets included vehicles (cars, boats, trucks, etc), homes, real estate, insurance policies (life insurance), bank accounts, band investments or stocks, and many other valuable things.
The most common examples of secured loans are auto loans, home equity loans, and mortgage loans. Secure loans are much riskier than unsecured loans because when you failed in back payments, your asset as collateral will be seized.
What Is The Benefit Of a Secured Loan?
There are many benefits to obtaining a secured loan. These benefits included:
Huge Amount Of Money: In secured loans, individuals can obtain a huge amount of money. For example, they can obtain a loan with an amount that ranges from £100,000 to £500,000. Whereas in unsecured loans, the borrowers can obtain an amount of only £25,000.
Longer Duration Of Repayment: In secured loans, some lenders provide longer duration of repayments. Typically the duration of repayment ranges between 5 to 20 years. So that borrowers can easily repay the loan. This benefit isn’t provided in unsecured loans. Because in unsecured loans the duration of repayment ranges from three to seven years.
Lower Interest Rates: Secured loans have lowers interest rates. Because the period of repayment in secured loans is longer, therefore the monthly amount of repayment will be lower.
Easier To Obtain A Secured Loan: Getting a secured loan is much easier than an unsecured loan just because of the collateral. When the borrowers get secured loans, lenders take any property or assets as collateral.
More Flexible: Secured loans are more flexible loans than unsecured loans. The borrowers can easily convert fixed-rate debt into variable-rate debt.
What Does Unsecured Loan Mean?
Unsecured loans mean borrowers don’t need any kind of collateral but they still charge fees and interest on the borrowing amount.
As there is no need for collateral in an unsecured loan, lenders need borrowers credit worthiness and history of repayments of previous loans for the approval of a secured loan.
Therefore, interest rates of unsecured loans are higher as compared to secured loans. But the interest rates of unsecured loans are not always higher.
According to Lending Tree, unsecured loans are growing day by day. For example, unsecured personal loans are gaining popularity, almost 22 million borrowers take personal unsecured loans in the United States.
Borrowers can take out unsecured personal loans for any goal. For example, borrowers can take out personal loans to renovate their kitchens, for weddings, and for vocations.
What is an unsecured loan example?
The most common examples of unsecured loans are included personal loans, student loans, and credit card loans. If the borrower fails to repay the loan, the lender won’t take anything from the borrower in response.
For instance, if any student takes out a student loan and he defaults on repaying it, his lender won’t seize his diploma or degree.
Student loans are typical of two types Federal and private student loans. Both categories are unsecured loans.
Benefits Of An Unsecured Loan
The main Benefits of taking out unsecured loans are as follows:
- Borrowers don’t need to pledge any of their assets like a home or car to get an unsecured loan.
- Unsecured loans get approved quickly as there is no need to evaluate any asset or property.
- Unsecured loans can be the best option for borrowers who want loans with lower amounts.
Drawback Of An Unsecured Loan
There are also a few drawbacks to getting an unsecured loan:
- The time period for the repayment is shorter, which means borrowers have to repay the loan in the shortest time. For example, the time period for repaying of loan is typically from three years to seven years.
- Borrowers have to pay higher interest rates because there is no collateral for the security of the loan. Collateral is replaced by borrowers’ credit history in unsecured loans.
- Difficult to get approved due to a lack of collateral.