Is a Personal Loan Better Than a Student Loan?
Personal loans have a reputation for having very versatile terms and options. Because of this, a lot of graduates are left thinking if taking out a personal loan is better than taking out a student loan.
Because of the flexibility of personal loans, a lot of lenders can outright approve personal loan applications for just about any legal purpose. A lot of people also find it to be a better and more cost-effective alternative for paying back high-interest student loan debt.
So, would it be easier to take out a personal loan to offset your student debt? There are some concrete benefits to both personal loans and student loans when it comes to paying your school fees. Personal loans have fewer parameters on how you use the funds but student loans are generally more flexible. Which option is right for you depends on your unique situation.
Here's what you need to know about the differences between a student loan and personal loan, and how each one impacts your financial position.
- Loan Use – The funds you get from a personal loan can generally be used for anything, so long as it’s legal. While some restrictions may apply, a personal loan is overall a multipurpose type of loan. A student loan, on the other hand, can only be used for the specific purpose of funding your secondary education.
- Payout – The money you get from your personal loan is usually deposited directly into your bank account while the school’s financial aid officer is the one who usually receives your school funds for a student loan.
- Potential Lenders – You can apply for both a personal loan and a student loan from banks and private online lending agencies. You can also apply for a personal loan through credit unions and a student loan from the federal government.
- Repayment Term Options – Repayment for a personal loan typically starts the month after the loan was released. Student loans, on the contrary, have a 6-month grace period after graduation.
- Discharge – Personal loans are dischargeable through bankruptcy while student loans may require a court appeal to be discharged.
Essentially, there is not much of a difference between a personal loan and a student loan. Both of them have almost the same terms, both do not charge for prepayment penalties, and both have almost the same effect on your credit. However, you can only use a student loan to cover for school-related fees, but you can use a personal loan for whatever financial expense you have, including student debts.
Taking out a personal loan can be one of the quickest ways to get out of your student debts because of its versatility and adaptability in purpose. A personal loan usually also has a fixed lower interest rate with shorter repayment terms, so, if your goal is to pay off your existing loan and to pay it off fast, then getting a personal loan would be feasible for you.
Another huge advantage of taking out a personal loan to pay your student debts is the option of debt consolidation. You can consolidate your multiple student loans into one single payment.
Qualifying for a new loan by yourself means you no longer need to find a co-signee for it, you can then pay off your existing debts using the funds that you received from your new personal loan and release the cosigners that you have on your student loans.
Also, student loans are tough, but not impossible, to discharge in bankruptcy. However, you have to be able to exhibit that paying the debt “will impose an undue hardship on you and your dependents.” In contrast to most student loans, a personal loan, however, is dischargeable in bankruptcy.
One downside to paying off a student loan with a personal loan is losing the benefits of forbearance and deferment options that you have on federal loans, or the reduced payment privileges for private loans. Check whether your existing loans have these benefits and whether you need to use them.
Another drawback is that most borrowers have a cap on individual loan amounts. Since there is no collateral to a personal loan, lenders usually restrict the sum that can be lent. Moreover, if you still have new credit a lender may not feel that have enough credit history to warrant a high amount of loan. So if you are a borrower with a large amount of student loan debt you may not be able to pay off all of your student loans utilizing a personal loan. Also, there aren’t any tax benefits on a personal loan. Each year borrowers can claim a tax deduction for up to $2,500 paid in interest on their student loans, but this is not extended to personal loans.
Is using a personal loan to pay off student loan debt right for you?
A personal loan may be a better route if you need money for more than just education. It can help with everyday costs that may come up, or your loan funds can be used to cover miscellaneous expenses like a trip during your university experience that you may not be able to take without a little additional financial aid.
However, if you know you’ll want a long term loan with more repayment flexibility, a student loan may be a better option. Because they have lower interest rates and don’t oblige you to start paying back straightaway, you can put more attention to your education without having to work or establish an immediate payment plan.
Several lenders are on the market offering personal loans to cover student loans. A personal loan is one of many worth exploring options when you’re looking for lower interest rates on your student loan. Alternatively, your new loans can be settled by refinancing creditors, along with lower rate offers than personal loans. Both refinancing and the use of a personal loan to cover your college loans has its benefits and drawbacks, in the end, it will boil down on your financial situation. Find what your targets for repayment could be, and explore your choices.