Secured and unsecured personal loans are available through banks, credit unions, and online lenders. There are many different types of personal loans available for different purposes.
If you’re considering a personal loan to get through a financial hardship or consolidate debt, you’re not alone. According to a recent Experian survey, the average consumer has about $19,402 in personal loan debt. However, depending on your credit and financial situation, some personal loans may be a better fit than others.
Types of Personal Loans
Personal loans are very flexible products with interest rates, terms and types to suit people with different credit profiles.
Check your credit score before applying, as this will help you decide whether you should get an unsecured or secured personal loan and whether you should consider a joint or cosigner loan.
You should also be clear about your financing needs and clear financial goals before applying, which will further narrow down the type of loan that might be best for you.
Knowing the type of loan you need will also help you decide where to begin your search. There are many different personal loans available from different banks, credit unions, and online lending companies.
Unsecured Personal Loans
Unsecured personal loans don’t require collateral to get approved. Eligibility is based on your credit score and income. You usually need good or excellent credit to be approved for the best interest rates. Some lenders also consider your employment history and education history.
Some lenders also consider your employment history and education history.
If you default on an unsecured personal loan, you don’t risk losing any assets, but your credit will be damaged. You could also face costly fees and legal proceedings if you can’t repay it.
Ideal for:
Those with good credit and low debt-to-income ratios (DTI).
Secured Personal Loans
Like auto loans and mortgages, secured personal loans also require collateral for approval. Rather than using your car or home as collateral, secured personal loans may rely on something like a certificate of deposit (CD) or savings account.
Because the loan is secured, the risk to the lender is less and they may be able to offer you a lower interest rate than an unsecured personal loan. However, you do risk losing the assets you have pledged as collateral if you default. This is because the lender can legally seize your assets to offset the debt.
Ideal for:
Borrowers who don’t have very good credit but are confident they can repay the loan.
Debt consolidation loan
A debt consolidation loan combines multiple loans into one payment, allowing borrowers to pay off their outstanding balances faster and potentially save on interest. The goal is to get a loan at a lower interest rate than you’re currently paying on the debts you plan to consolidate (credit cards, medical bills, and other bills).
New loans can come with origination fees and other charges that can eat into your savings, so make sure you have a plan to manage your loans so you don’t get further into debt.
Ideal for:
People with multiple high-interest debts.
Cosigners and joint loans
If you don’t qualify for a personal loan on your own, a lender may approve you for a loan with a creditworthy co-signer.
A co-signer must be willing to assume equal responsibility for the loan even if they do not have access to the funds, and must be able to cover the costs of the loan from their own income alone.
If you default on your loan payments and your co-signer can’t make the payments, your credit score will drop along with yours.
Some lenders also offer joint loans, which allow both borrowers to have access to loan funds. As with a co-signed loan, both parties are responsible for paying the loan. To increase your chances of getting approved for the loan, your co-borrower should have good or excellent credit.
Ideal for:
Borrowers with low credit scores but who have a creditworthy co-signer or who want to share access to loan funds.
Fixed-rate loans
With a fixed-rate loan, your interest rate will remain the same for the life of your loan. You pay the same amount every month for the life of the loan, with part of each monthly payment going towards interest and principal.
The vast majority of personal loans fall into this category. Because your payments don’t change over time, it’s easier to budget accordingly if you take out a fixed-rate personal loan.
Ideal for:
Borrowers with good credit who prioritize payment stability are eligible for competitive interest rates.
Variable Rate Loans
The interest rate on a variable rate loan will fluctuate based on market conditions, but you may be able to get a lower APR with a variable rate loan than with a fixed rate loan.
The downside, of course, is that variable interest rates can rise. Variable-rate loans can also be harder to budget for because your repayments change over time. You might want to take out a shorter-term loan to pay it off faster and avoid the risk of interest rates rising sharply.
Ideal for:
Individuals looking for cheap short-term loans.
Personal credit line
A personal line of credit gives you access to a pool of funds that you can borrow when you need it, similar to a credit card. You only pay interest on the amount you borrow.
This may be a good option for people who want flexible access to funds but want a better interest rate than a credit card can offer. A line of credit may be useful for kitchen or bathroom renovations, overdraft protection, or ongoing emergencies.
Personal lines of credit usually have variable interest rates and are secured by bank assets, although you may find unsecured options through online lenders or smaller banks.
Ideal for:
People who take on longer term, more expensive purchases or projects.
Buy now, pay later loan
Buy now, pay later financing allows you to buy a home without paying the entire purchase price up front. Instead, you pay the remaining balance in equal installments, usually due in full within six weeks of the purchase date.
These loans are often offered through mobile apps such as Afterpay, Klarna, Affirm, etc. Most lenders will verify your bank transactions and may conduct a soft credit check, which won’t affect your credit score.
This means that you may be able to get approved for a buy now, pay later loan even if your credit score isn’t the best, as long as you have the income to support the payments.
On-time payments on BNPL loans aren’t typically reported to credit bureaus, but late payments may be, meaning this type of financing is more likely to hurt your credit score than boost it. Beware the temptation to overspend or take out more BNPL loans than you can handle.
Ideal for:
Borrowers who require immediate financing for each purchase.
Types of loans to save on
Some personal loans have sky-high interest rates and should only be taken out as a last resort. For borrowers with poor credit or no access to a bank account, a personal loan may be one of the limited options available.
If you can avoid it, then you should, but if you can’t, make sure you keep up with your payments and pay off your loans as quickly as possible.
- Credit Card Cash Withdrawal: Some credit card issuers allow you to get a cash advance from an ATM or your available credit at a bank. This privilege can be costly; you may be charged a cash advance fee and a high interest rate on the amount you borrow.
- Cash advance apps: These apps also allow you to access instant cash before your payday, usually up to $250 or $500. Most lenders charge a monthly fee to use their service, and the amount borrowed must be repaid by your next payday or within two weeks.
- Payday Loans: These loans are a costly form of debt for borrowers with poor credit. Payday loans typically come with hefty fees and interest rates of over 300 percent. If you can’t repay them and have to extend the loan term, you could get caught in a dangerous cycle of debt.
- Pawnbroker Loans: If your local pawn shop is offering financing, you can exchange your assets for cash. You’ll pay a lot of interest, and the pawn shop will seize your assets if you don’t repay them.
- Title Loans: With an auto loan, you borrow money against the ownership of your car. Because you’re borrowing against the value of your car, you can get a lower interest rate than an unsecured loan. But you can also pay high fees and risk losing your car if you don’t make payments.
What type of personal loan is right for you?
You need to research which option is best suited to your financial situation. Compare the interest rates and terms of the personal loan, the period you have to repay the borrowed amount, and whether the debt is secured or unsecured. You should also look at customer reviews of different lenders.
Conclusion
There are several types of personal loans. Each has its own advantages and disadvantages. Make sure you understand how a personal loan works and what you can expect before applying for one.
