All Loans Are Not Created Equal

“A loan is a loan is a loan.”  I’ve heard it said many times, and it makes me cringe every time I hear it.  If you’re referring to it in the context of, “a plague is a plague is a plague,” then I am in total agreement.  Stay away from the loan plague.  The part that makes me cringe is when people refer to borrowing money for personal expenses and they think the only thing to look at is interest rates.

As a borrower you must look at more than just interest rates, you must also look at payment terms, cosigner obligation, and penalties for non-payment.

So you need $500 for personal expenses while your at school, here are some of the considerations that come into play:

Interest Rate

Most people don’t get past this point, so they think, “hmm, my student loans have a low interest rate, I can take out a slightly larger student loan next semester, get a small refund from the school and use it on personal expenses.”  They ignore the fact that the repayment terms may be less than desirable, that it might also have an effect on cosigners, and that ultimately if their personal finances come crashing down, there is no debt protection like other loan types might offer.

More importantly it allows a habit to start forming.  What was once a small need for some personal expenses becomes permission to access easy money instead of using financial discipline.  Why take out $500 to cover the basic personal expenses when you can take out $1000 and go to movies, party with friends, go out to dinner, etc?  It’s a vicious cycle, and its harms the college students ability to respect the laws of finance and the value of money.

Payment Terms

The quicker you pay something off, the less interest you will end up paying.  Student loans are usually paid over 10 to 15 years.  Personal loans may be capped at 5 years.  In theory, credit cards could go forever.  A student should at least take this into consideration when obtaining a loan.  You may not have to start repaying your private student loan for up to four and a half years: in some cases more.  All that time interest is building.

Cosigner Obligation

Are you bringing other people into debt with you when you borrow personal expenses?  You can read more on the effect debt can have on cosigners here.

Penalties for Non-Payment

I often refer to private student loans as the most toxic form of debt.  They are too easy to get, and have the worst consequences if not paid.  Why would anyone what to add their most dangerous debt?  Consider what would happen if something happens and you aren’t able to pay back your loan.  You will find that all debt, with the exception of student loans can affect you and your financial livelihood for up to 13 years.  Student loans will last a lifetime.

There isn’t a single correct solution for every student, but careful consideration of all factors is the only thing that will help you make the right decision about which loans to choose.  Quite frankly, $500 a month isn’t that much money, getting a job to pay for personal expenses is better than any loan will ever be.

Usually when people say that everything in a certain group is the same they are uneducated on the topic.  It’s also known as stereotyping.