Personal Loans

Personal Loans vs Student Loans: Know the Difference

Personal Loans vs Student Loans: Know the Difference

At a Glance

Two of the most common loan types seen today are personal and student loans. While these loans may seem similar on the surface, they serve different purposes. Choosing the right loan type will help to ensure you receive the funds you need for the correct purpose.

As with any form of debt, it is advised not to take on more than you can pay back in full and on time.

What is a student loan?

A student loan is a specialized type of loan geared towards costs associated with college. There are two types of student loans a person may seek: private and federal. The latter is funded by the government, whereas the former comes from privatized sources such as third-party lenders. While private student loans will require a credit check, federal student loans will not require a credit check or certain income requirements.

What can student loans be used for?

Unlike personal loans, student loans can only be used for a single purpose: costs related to college. The definition of these costs can vary, depending on each lender, but they may include tuition, textbooks, supplies for classes, child-care for dependents, technological equipment such as a laptop or monitor, and much more. It’s important to read the terms of your student loan to specifically identify what you can use the funds for.

What are the interest rates on student loans?

The interest rate offered on student loans is typically lower than that offered on personal loans. Federal student loans currently have a rate just under 5%, whereas private student loans can vary quite a bit more. However, private student loans will typically still be around 4% depending on your credit score, credit history, and several other factors.

Benefits of a student loan

When looking at a student loan vs. personal loan, it’s important to evaluate the benefits of each type. There are several benefits that student loans can offer to current or prospective students:

  • Student loans offer crucial financial support to those who may not be able to attend school otherwise
  • Fixed interest rates on federal student loans ensure you know what you are paying
  • Many student loans will delay the start of repayment until after you graduate
  • Flexible repayment plans are offered

As with any form of debt, it is advised not to take on more than you can pay back in full and on time.

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What is a personal loan

On the other side, a personal loan is a sum of money offered by banks, credit unions, or online third-party lenders. Typically, a personal loan will be anywhere between $1,000-$100,000 and can be used for virtually any purpose. A personal loan vs. student loan comparison becomes quite similar when looking at the repayment style, considering there is a monthly payment required.

In most cases, a personal loan is unsecured, meaning there is no collateral. This means that if you cannot pay the loan, the lender has nothing to take possession of in return. However, unsecured loans usually carry a higher interest rate due to this fact.

Learn more: Everything You Need to Know About Personal Loans

Interest rates on personal loans

Interest rates on personal loans are far more variable than that of student loans. Whether looking at a personal loan or student loan, you can expect to see 5% to be one of the lower figures for an interest rate. However, personal loan interest rates can rise as high as 35% depending on a variety of factors.

Your credit score, credit history, income level, and other information from your application will all play a role in the interest rate you are offered on a personal loan.

Benefits of a personal loan

Looking at a federal or private student loan vs. personal loan, there are key differences in the benefits. A personal loan can be used for a variety of sources, but that is just the beginning of the benefits:

  • Immediate access to funds once approved in most cases
  • Flexible repayment terms can vary from one year to seven years on average
  • Funds can be used for almost anything
  • You know what you will be paying in most cases
  • Most loans are unsecured

While the benefits of an education loan vs personal loan can both be extremely helpful, there are still key differences between the two.

Student loan vs personal loan

When looking at a personal loan vs. education loan, there are crucial differences to cover. The primary difference between personal loans vs. student loans is the use of funds. Student loans are required to be used for educational purposes whereas a personal loan can be used for anything, barring items restricted by the lender (if any).

Student Loans Personal Loans

How do student loans and personal loans work?

  • A student loan is a specialized type of loan geared towards costs associated with college.
  • There are two types of student loans a person may seek: private and federal. The latter is funded by the government, whereas the former comes from privatized sources such as third-party lenders. While private student loans will require a credit check, federal student loans will not require a credit check or certain income requirements.
  • A personal loan is a sum of money offered by banks, credit unions, or online third-party lenders.
  • Typically, a personal loan will be anywhere between $1,000-$100,000.

What are student loans and personal loans used for?

  • Unlike personal loans, student loans can only be used for a single purpose: costs related to college. The definition of these costs can vary, depending on each lender, but they may include tuition, textbooks, supplies for classes, child-care for dependents, technological equipment such as a laptop or monitor, and much more.
  • It’s important to read the terms of your student loan to specifically identify what you can use the funds for.
  • A personal loan can be used for virtually any purpose.
  • A personal loan vs. student loan comparison becomes quite similar when looking at the repayment style, considering there is a monthly payment required.
  • In most cases, a personal loan is unsecured, meaning there is no collateral. This means that if you cannot pay the loan, the lender has nothing to take possession of in return. However, unsecured loans usually carry a higher interest rate due to this fact.

What are the interest rates on student loans and personal loans?

  • The interest rate offered on student loans is typically lower than that offered on personal loans.
  • Federal student loans currently have a rate just under 5%, whereas private student loans can vary quite a bit more. However, private student loans will typically still be around 4% depending on your credit score, credit history, and several other factors.
  • Interest rates on personal loans are far more variable than that of student loans. Whether looking at a personal loan or student loan, you can expect to see 5% to be one of the lower figures for an interest rate. However, personal loan interest rates can rise as high as 35% depending on a variety of factors.
  • Your credit score, credit history, income level, and other information from your application will all play a role in the interest rate you are offered on a personal loan.

Benefits of student loans and personal loans

  • Student loans offer crucial financial support to those who may not be able to attend school otherwise
  • Fixed interest rates on federal student loans ensure you know what you are paying
  • Many student loans will delay the start of repayment until after you graduate
  • Flexible repayment plans are offered
  • Immediate access to funds once approved in most cases
  • Flexible repayment terms can vary from one year to seven years on average
  • Funds can be used for almost anything
  • You know what you will be paying in most cases
  • Most loans are unsecured

When is a student loan the right choice?

If you are seeking funds for educational related purposes such as tuition, textbooks, school supplies, or other similar items, a private student loan is an excellent choice. You will likely receive a lower interest rate than if you were to apply for a personal loan and the repayment period can go on longer. Therefore, current or prospective students needing funds for these purposes should choose a student loan.

When is a personal loan the right choice?

A personal loan is the right choice for you if you are not seeking the funds for educational related items and are simply trying to fill gaps in your expenses. Personal loans allow you to have more freedom with the funds in terms of what they are used on. Keep in mind, however, that personal loans will often come with a higher interest rate, so be sure you can meet all necessary payments.

FAQs

No, student loans are a specialized type of loan where the funds can legally only be used on educational related expenses, as defined by each specific lender. A personal loan, on the other hand, can be used for virtually any purpose unless that purpose is restricted by the lender. Securing a personal loan for education purposes is possible, but it is typically only used for smaller expenses that a student loan may not cover.

One commonality when looking at a personal vs. student loan is that both are unsecured loans. A private student loan or personal loan will not be secured by any type of collateral, meaning your cash is the only source of repayment a lender can rely on.

Yes, it is technically possible to use a personal loan to pay off student loan debt, but it is not recommended. One big difference when looking at student loans vs. personal loans is the interest rate and repayment terms offered. A college student loan will almost always have a lower interest rate than a personal loan, and upper end personal loan rates vs. student loan rates can vary greatly. Taking on a higher interest rate personal loan with a stricter repayment term to pay off a student loan with a lower rate is not recommended.

One option to consider for paying off student loans is to investigate refinancing the loan to see if you can receive a more favorable interest rate. If you are able, pay off more than the minimum payment each month to start chipping away at the debt. In a worst-case scenario, seek help from friends and family or talk with your lender about potential leniency during repayment periods. If you don’t think you will be able to make a payment, it’s always best to get ahead of it and speak with the lender.