Are Student Loans Considered Secured or Unsecured Debt?April 3, 2022
The larger a loan is, the more risk a lender takes on by offering it. That’s why some types of loans are harder to qualify for than others.
But strict eligibility requirements aren’t the only measure lenders use to protect themselves. Some types of loans are secured, which means that the loan is attached to collateral that can be repossessed if the borrower defaults.
So which types of loans are secured, which are unsecured, and what are the benefits of each type? We’ll answer that question below and explain how it might apply to your student loan situation.
What is Secured Debt vs. Unsecured Debt?
Secured debt has collateral behind it, which the lender will repossess if the borrower stops making payments. Mortgages, home equity loans, and auto loans are the most common types of secured loans.
Unsecured loans have no collateral behind them, like personal loans, credit cards, and student loans. If you default on an unsecured loan, the lender cannot collect anything in response. For example, if you default on a student loan, the lender can’t take away your diploma. Both private and federal student loans are unsecured loans.
Secured loans usually have lower interest rates than unsecured loans because the lender has collateral. Secured loans may also be easier to obtain and have lower income and credit score requirements than unsecured loans.
Benefits of Secured Debt and Unsecured Debt
Choosing between a secured loan and an unsecured loan comes down to your personal circumstances and preferences.
Interest rates are much lower with secured loans because the lender has a tangible item they can repossess if you stop making payments. Unsecured loans are less risky because you’re not potentially giving up anything if you default on the loan. You’ll pay a higher interest rate on an unsecured loan, which is the downside.
Can You Convert Unsecured Loans to Secured Loans?
When you have an unsecured loan, like a student loan, you may consider converting it into a secured loan. There are a couple of ways to do this. If you’re a homeowner, the most common option is to take out a home equity loan and use the proceeds to pay off your student loans.
A home equity loan lets you borrow against the home and receive the excess equity in cash, which you can use for home improvement projects, vacations, or paying off student loans. Interest rates on home equity loans are typically higher than interest rates on regular mortgages.
A home equity loan will use your property as collateral. If you default on a home equity loan, the bank could repossess your home.
Another option is a cash-out home refinance. To qualify for a cash-out refinance, you must have at least 20% equity in the home. With a cash-out refinance, you can refinance the home into a new loan and receive the extra equity as cash. You can pay off your student loans using the money from a cash-out refinance.
You will only have one home loan with a cash-out refinance. However, the downside is that your mortgage loan balance will be higher than it was before. This means you may end up paying more in total interest over the life of the loan.
Another risk with a cash-out refinance is that you may have a problem later on if housing prices fall and your home is worth less than the mortgage. In this case, you will be unable to sell the home unless you can come up with the difference between the mortgage balance and the sale price.
Refinance Student Loans to Save Money
If you’re wary of using your home’s equity to pay off your student loans, there is another way to save on student loan interest. You could refinance your student loans with a private lender to get a lower interest rate.
ELFI could help you refinance both federal and private student loans, and borrowers can pick between a fixed interest rate or a variable interest rate.*
Fixed-rate loans will have the same interest rate during the entire loan term, while variable-rate loans will have an interest rate that fluctuates during the loan term based on outside market factors.
ELFI offers five, seven, 10, 15, or 20-year terms. Longer loan terms will have lower monthly payments, while shorter loan terms will have higher monthly payments. Interest rates are higher for longer loan terms and lower for shorter loan terms. When deciding between loan terms, pick a monthly payment you can comfortably afford.
ELFI does not charge any origination, application, or prepayment fees.
When you refinance with ELFI, you’ll receive a personal loan advisor who will guide you through the entire refinancing process. ELFI has a 4.9 out of 5 rating on Trustpilot with more than 1,700 reviews.