There are two types of debt available to consumers: secured debt and unsecured debt. Secured debts require some form of collateral, while unsecured debts rely on your promise to pay and generally have higher interest rates. When looking to take on debt, it’s important to know what you’re dealing with. Let’s start with the basics.
Your student loans, before and after refinancing, are unsecured debt. Unsecured means no tangible asset to show for the four, five or even six figure debt you took out for your education. You can’t drive your student debt around and that piece of paper you meant to get framed ages ago isn’t as satisfying as a place to come home to at night. The value of a college education can be seen the job you have and the connections you made in school. Here is how unsecured and secured debt works on the lender’s side.
To a lender giving out unsecured debt, creditworthiness will be the most important factor. Because no collateral is taken as security against non-repayment, the borrower issued the loan must be trustworthy in order for the lender to be willing to take the risk. Student loans and credit card bills are examples of unsecured debts. The debt-to-income and credit score requirements are likely to be more strict for these loans since there is more risk involved for the lender.
Secured debt financing is easier to obtain. The reason for this is that lenders take on less risk by introducing terms necessitating an asset be held as collateral. Because of the decreased risk for the lender, the interest rates on this type of loan are generally lower. A mortgage is an perfect example of a secured loan.
That lower risk for the lender is what leads secured loans to easier to qualify for and have lower rates. Other stipulations for a secured loan might be insurance for whichever asset is put up as collateral, to maintain the value of said asset. After all, if you take out a car loan and someone totals the car, you won’t have much motivation to repay the loan in full (but you’d be no less obligated). With insurance, in the event of a crash, the lender can recover most, if not all, of the outstanding balance of the loan.
Secured debt represent access to life’s essentials – like shelter or transportation – and thus present you with reasonable risk, encouraging you to be diligent about repayment. Unsecured debt doesn’t mean bad debt. It just means that there is no collateral. With student loans, funding your education is worth taking on the loans to better your future and increase your earning potential.
If you’ve got unsecured debts, chances are you’ll be looking to pay those off as soon as possible. After all, the sooner it’s paid off, the more you save on interest cost. You can refinance student loans to a lower interest rate and a more favorable repayment term to get out of debt faster. Get started with our rate calculator to see how much you can save.