Monday, October 26, 2015

Rates are Higher on Unsecured Loans

Interests rates are higher on unsecured loans. That's really all there is to it.

Now, for the background: Socialist Senator and Democrat presidential candidate Bernie Sanders was quoted as saying, "It makes no sense that students and their parents pay higher interest rates for college than they pay for car loans or housing mortgages."

Robert Tracinski at the Federalist responds:
Why do car loans and mortgages have lower interest rates? They are secured by a tangible asset that can be reclaimed by the lender if the borrower stops paying. The bank can foreclose on your home or repossess your car, so they end up with an asset they can sell to recoup their losses. Rates on these loans are likely to be lower because the lender’s risk is lower. An education, by contrast, is not a tangible asset. It cannot be reclaimed and has no value other than to the person who acquired it.
He has graphs and stories and some economics to continue the story, and we could discuss how student loans drive up education costs, but secured vs. unsecured is really as far as we need to look for why the Sanders quote makes no sense.

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