At a Glance
There are many different types of personal loans depending on your needs and other factors, and it’s important to research and compare the options to find the best one for you. In this article, learn more about:
Common uses for personal loans
Personal loans are a popular financing option because they can be used for just about anything, including:
- Debt consolidation
- Medical bills
- Car repairs
- Home improvements
- Large purchases
Whenever you can, you should try to use savings for major purposes to avoid taking on additional debt. However, sometimes that’s not an option, so a personal loan may be a good fit. Keep in mind you should only take out a personal loan if you have a high enough credit score to get a low interest rate, and if you’re able to fit the monthly payments in your budget.
Related: Reasons to Get a Personal Loan
What are the different types of personal loans?
The most common types of personal loans are unsecured, fixed rate loans, but there are other options to consider depending on your needs, credit score, and financial situation. To help get you started in finding the right one for you, here are a few to look into and compare.
1. Unsecured personal loans
Most borrowers will get an unsecured personal loan, meaning the loan is not backed by any assets used as collateral. Because there’s nothing backing the loan, they are slightly more risky for lenders if you don’t repay it. This means these loans may have a higher APR, but this is ultimately based on your credit score, credit history, income, other debts, and other factors.
To get an unsecured loan, borrowers typically must have a credit score of 670 or better. And remember, even though there’s no collateral you’d lose if you fail to repay the loan, it doesn’t mean you’re off the hook. Late or missed payments can damage your credit score and the loan could be sent to a collections agency.
2. Secured personal loans
On the other hand, secured personal loans are backed by collateral, which is an asset like a car, house, savings account, investment, or other item of value. If you fail to repay the loan, the lender can seize that asset. This makes these loans less risky. Examples of secured loans can include mortgages and auto loans, but you may also get a secured personal loan. Most of the time, secured personal loans can be an option for those who don’t have great credit.
3. Fixed rate loans
Most personal loans have fixed interest rates, which means the rate does not change throughout the life of the loan. This also means your monthly payments don’t change, which helps make these payments easier to budget for, and you can more easily calculate how much you’ll end up paying over the loan’s term.
4. Variable rate loans
Also called adjustable rate loans, variable rate loans are tied to a benchmark rate set by banks, meaning the rate can increase or decrease throughout the loan’s term. At some times the rate may be lower than a fixed rate loan, but at others it can be higher.
The good news is most variable rate loans have a cap on how much the rate can change over a particular period of time, and over the life of the loan. These loans are more difficult to budget for because your monthly payment can change, and it’s also more difficult to calculate how much you’ll end up paying.
5. Debt consolidation loans
If you have outstanding debt from multiple sources that will take more than a year to pay off, you may want to consider consolidating your debt. When you consolidate debt, you take out a personal loan at a lower interest rate and with a better term than your existing debt, and use the new loan to pay off your old debts. This leaves you with one single monthly payment, ideally at a lower interest rate, allowing you to pay off your debt faster and potentially save money.
6. Co-signed and joint loans
If you have poor credit and can’t qualify for a personal loan on your own, a co-signed loan could be an option. It can also help you secure a lower APR. With these loans, you have a cosigner (typically with excellent credit) who promises to repay the loan if you don’t. This person doesn’t have access to the loan funds, but they are required to make payments if you miss any.
Related: Personal Loans With a Cosigner
7. Personal line of credit
A personal line of credit is more like a credit card than a personal loan, because instead of getting one large lump-sum of cash, you have access to a revolving credit line and you can borrow the cash you need when you need it. Because you only pay interest on what you borrow, this can be a good option for someone who doesn’t need a large amount of money at once. It also is great for paying for ongoing expenses or in the event of an emergency.
8. Buy now, pay later loan
With a buy now, pay later loan, you can split a purchase into smaller installments. Typically this happens with online purchases, and at checkout, you can create an account and pay for part of the purchase now. Then, you authorize the site or app to charge you the rest of the balance in installments. These loans can be a good option for those who don’t have great credit. In most cases, they will review your bank account transactions instead, though they may also do a soft credit pull.
9. Small personal loans
Small personal loans are great if you have a smaller purchase you need funds for. Because they are smaller, sometimes as low as $1,000, the repayment terms are much shorter. These loans are also affordable for borrowers with excellent credit, and quick and easy to get because the process usually happens online.
10. Installment loans
Installment loans are a type of loan that is paid back with regularly scheduled payments over time. Usually, the payments are set sums that are agreed upon between the lender and borrower. Personal loans are a type of installment loan because you’d receive the cash up front and repay it over time. Other examples include auto loans, mortgages, and student loans.
Learn more: Installment Loans – Compare Best Options of 2022
11. Credit union personal loans
A credit union personal loan is a personal loan you get from a credit union. These are considered private loans, and therefore don’t rely solely on credit scores and histories to qualify. This loan is a fixed amount you apply for and you receive the funds at once, and you can use them for any reason you’d use a regular personal loan. In order to apply, you must be a member of a credit union.
Learn more: How credit union personal loans work
Types of loans to avoid
If you decide a personal loan is the right financial move for your needs, it’s important to do your research to understand all of your options because not all personal loans are created equal. In fact, there are some types of loans you should avoid altogether.
1. Cash advance apps
Cash advance apps allow you to access small amounts of cash (usually about $200 or less) fast from your next paycheck. However, these apps typically charge a monthly fee to use them, and the repayment terms are very short, usually within two weeks or by your next payday. The app will withdraw the amount you borrowed from your bank account when the term is up.
2. Credit card advance
Some credit card companies allow their customers to take out a cash advance from an ATM or bank. The cash advance allows you to borrow from your available credit on your card. The biggest downside is that you’ll be charged a cash advance fee, and interest rates on the amount you borrow can be significant.
3. Pawnshop loan
You can get a pawnshop loan by giving your local pawn shop an asset in exchange for cash. However, you’ll likely be charged a large interest rate (sometimes 200% or more), and if you don’t repay the loan in time, the shop will keep your item. These terms are usually short, so you don’t have much time to repay the cash borrowed plus interest in order to get your item back. The upside is you avoid damaging your credit or having your debt sent to collections.
4. Payday loans
These loans allow you to borrow against your next paycheck, and are often a consideration for borrowers that have poor or no credit. However, the extremely high interest rates and short term can create a dangerous debt cycle if you must extend the loan term.
Tips to select the best type of personal loan for you
Once you’ve decided that a personal loan is the right financial move for you, it’s a good idea to do some research and comparison of different options and lenders. Not all loans are created equal, and not all lenders offer all options.
Here are a few tips to help you compare personal loans and find the right one for you:
- Shop different lenders. If you have an excellent credit score and/or are already a customer, banks may offer the best APR and terms for a personal loan. If you are a member of a credit union, they may also be able to get you favorable rates and terms, and sometimes have criteria other than credit score to help you qualify.
Online lenders often have the best rates and terms, and usually have fast approval and funding processes. They also provide more options for borrowers with poor credit, but the downside is there’s not any in-person support.
- Remember the purpose of the loan. Personal loans can be used for just about anything, but in some cases you’ll find lenders that restrict the use of loan funds for certain purposes (such as postsecondary education or business purposes). Make sure the reason you need the loan is allowable – check the borrower agreement to find this information.
You may also find some personal loans are designed specifically for certain purposes, like debt consolidation. These may offer a lower APR or other benefits depending on the use.
Read More: How do Personal Loans Work?
- Get prequalified. Many lenders, especially online lenders, give you the opportunity to get prequalified for a loan. This does not affect your credit score, but allows you to submit information like the ideal loan amount and term, your income, credit score, and other relevant details to get a personalized estimate of loan amounts, rates, and repayment terms you’d qualify for.
While prequalification isn’t a guarantee, it can help you more accurately compare your options as you shop.
- Be aware of fees. Fees to be aware of when it comes to personal loans include origination fees, application fees, late payment fees, prepayment penalties, or others. While some of these fees, such as those for late payments, can be avoided, others cannot. Be sure to ask about fees when shopping for the best loan and understand whether the fees are built into the APR or are an additional cost.
- Compare customer support ratings. Customer support should be an important factor in finding the best lender for you. If you ever have issues with payments, have financial hardship during your loan term, or even just have questions, a highly rated customer support team is key. Compare customer service resources and be sure to read ratings and reviews from current and past customers.
Read More: How to Get a Personal Loan
Personal loans can impact your credit score in a few different ways. First, if you miss any payments or make late payments, that will negatively impact your score. Second, the amount of debt you have relative to your credit limit can also affect your score. If you have a personal loan with a high balance, that could increase your debt-to-credit ratio and lower your score. Finally, the age of your personal loan can also factor into your credit score. If you have a newer personal loan, that may not impact your score as much as an older one. Ultimately, personal loans can have both positive and negative effects on your credit score depending on how you manage them.
A personal loan is a type of installment loan, meaning you borrow a certain amount of money and pay it back (with interest) in monthly payments over the life of the loan, or term. Loan terms typically range from 12-84 months. Then, once you’ve completely paid off the loan, the account is closed.
APR depends on a number of factors such as the borrower’s credit score, credit history, income, income-to-debt ratio, and more. It also can depend on the type of loan, such as if it’s secured or unsecured, or has a fixed or variable rate. If you have poor credit, you’ll likely have a higher APR than borrowers with excellent credit. Secured loans also may have lower rates than unsecured, though you risk losing your collateral if you fail to make payments.
The type of personal loan you should get depends on your personal needs and situation. Whether you have a high or low credit score, high or low income, other debts, and even the loan amount you want to borrow can all affect which loan you should choose. Be sure to get prequalified when you can for more personalized estimates to compare, and do your research with different lenders to find the best option.
There are many types of personal loans, including unsecured and secured, fixed and variable rates, co-signed, debt consolidation loans, and more. Personal loans can even be designed to fit certain needs, such as a medical loan, home improvement loan, credit builder loan, wedding loan, vacation loan, boat loan, and more. Regardless, there is likely a type of personal loan to fit your needs and situation.