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Types of personal loans

Types of personal loans (2023)

Knowing what you need can help you choose the right loan

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Updated: 05/08/2023

Learn about personal loans

piggy bank on loan forms with calculator

A personal loan can help you get funding when you need it, whether you want to make a large purchase, pay off lingering bills or consolidate several debts. Many personal loans (but not all) come with fixed interest rates, fixed monthly payments and a set repayment schedule that won’t change for the life of the loan. This can make personal loans more predictable than other types of loans.

However, personal loans can vary based on how the funds can be used, whether collateral is required and the amount of interest and fees charged. Understanding the various types of loans is crucial to deciding which will work best for your situation.

Key insights

Personal loans often come with fixed interest rates and fixed monthly payments. However, variable-rate loans and lines of credit are also available.
Personal loans are often used for debt consolidation, weddings, home remodeling projects and other large purchases.
While you can apply for a personal loan through a traditional bank or credit union, online lenders may offer the best rates and terms.

The different types of personal loans

Before you can find the best personal loan, you'll want to understand the different loan types, how they work and their pros and cons. Here are the most common types of personal loans:

Unsecured loans

An unsecured personal loan is a loan that does not require collateral. This means that if you fail to repay the loan, you won’t have to surrender an asset, such as a car or savings in a bank account.

While the lack of collateral is a major advantage of unsecured personal loans, these loans may be more difficult to qualify for than secured loans that do require collateral.

To apply for an unsecured personal loan, you'll share certain information with the lender, like your employment situation and Social Security number. From there, you can be approved or denied for the loan based on your income, credit history and other factors.

Secured loans

With a secured personal loan, you have to put down some type of collateral, which can be seized if you don't make the loan payments. For example, auto title loans require you to provide the title of a vehicle as collateral. Collateral could also be cash you have in a savings account or certificate of deposit (CD).

While putting down collateral may not seem ideal, secured loans are often easier to get approved for since the lender can seize your asset if you fail to repay. This makes secured loans a good option for people who have imperfect credit but own an asset they can put down to help them qualify.

Fixed-rate loans

A fixed-rate loan has a set interest rate that does not change during the entire loan term. This also means the borrower knows exactly how much they'll pay each month and how long the loan term will last.

Fixed-rate loans are best for people who want the certainty of a locked-in interest rate and loan payment that won't change based on market conditions.

Variable-rate loans

Variable-rate loans have interest rates that fluctuate over time because they are tied to an index or benchmark interest rate. This means interest charges on variable-rate loans can go down when rates drop or increase dramatically in a high-interest environment. Some variable-rate loans have a rate cap, which is the maximum interest rate the borrower can be charged.

When a variable-rate loan’s interest rate goes up or down, the monthly payment on the loan fluctuates accordingly. This means variable-rate loans are good for borrowers when rates are dropping, but they can become expensive when rates are on the rise. As such, a variable-rate loan can be a good deal for a borrower who plans to pay off their loan early before its interest rate can go up.

» MORE: Interest rates and how they work

Co-signed and joint loans

Co-signed and joint loans involve multiple applicants. A joint loan has two co-borrowers, both of whom have access to the loan’s funds. A co-signed loan’s primary borrower has access to the loan’s funds; its co-signer does not have access to the loan’s funds, but their income and credit score may increase the primary borrower’s chances of approval for the loan.

Co-signed and joint loans are similar in many ways, and the terms are often used interchangeably. But there are slight differences between the two loan types and their typical use cases. Joint loans are typically best for couples who want to borrow together for a joint goal. Getting a co-signer makes sense when you want to be the primary borrower for a loan but don’t have the income or credit to qualify for the loan independently. For example, it’s common for a parent to co-sign on their child’s student loan.

With co-signed and joint personal loans, borrowers and co-signers alike are legally responsible for repayment. This also means that if loan payments are not made, the credit scores of both borrowers and co-signers will suffer.

» MORE: What affects your credit score?

Debt consolidation loans

A debt consolidation loan consolidates multiple debts into one. This type of personal loan lets you make a single payment each month at a (hopefully) lower interest rate than the rates that were charged for the previous debts.

A fixed-rate debt consolidation loan comes with a set repayment period that lets you know exactly when you can become debt-free. This makes debt consolidation loans a solid option for consumers who want to create a debt payoff plan they can stick to.

Alternatives to personal loans

If you need to borrow money but aren’t sure if a personal loan is right for you, there are other options to consider.

However, Howard Dvorkin, a certified public accountant and the chairman of consumer education site Debt.com, warns that all borrowing options have the same downsides. "None of them involve free money," he said. "You will need to pay back what you borrowed."

No matter what credit product you choose, avoid predatory lenders with exorbitant interest rates and be careful not to overborrow.

Personal lines of credit

A personal line of credit (PLOC) is an amount of money that you can draw on repeatedly over time. This makes PLOCs similar to credit cards, except that PLOCs are designed for withdrawing cash.

PLOCs typically have a draw period when you can access funds, followed by a repayment-only period when you can no longer access funds. A PLOC’s interest rate is usually variable, and interest is only charged on amounts you borrow from your credit limit.

A personal line of credit may work best for people who are unsure of the amount of cash they need and want to be able to borrow smaller sums of money repeatedly over a specific timeline.

Home equity

If you own a home and have substantial equity, you can consider a home equity loan or home equity line of credit (HELOC). But be aware that both options use your home as collateral, so you can lose your property to foreclosure if you fail to make your home equity loan or HELOC payments.

You can even get cash from a mortgage refinance. However, this step may actually cost you more money over time if the interest rate for your new home loan is higher than the rate you originally had.

Credit cards

If you want to make a large purchase that you can pay off within a year or two, or if you have a relatively small amount of debt that you’d like to consolidate, it might make sense to take advantage of zero-interest credit card promotions. Many credit cards offer a 0% annual percentage rate (APR) on purchases, balance transfers or both for up to 21 months.

Just remember that if you plan to utilize a balance transfer promotion, balance transfer fees usually apply. And once a credit card’s zero-interest promotion ends, its APR will jump up to a standard rate. The average APR for credit cards is considerably higher than the average APR for personal loans.

How to choose the right personal loan

To find the right personal loan for your needs, you'll want to shop around with a few different lenders. Consider the following factors before you apply:

Loan fees: Some personal loans come with origination fees that can range from 1% to 10% of the loan amount. Watch out for other hidden fees as well, like application fees, late payment fees and prepayment penalties.
Interest rates: Compare interest rates across several lenders to find the lowest rate you can qualify for.
Loan amounts: The minimum loan amount offered by some lenders might be more money than you actually need. Conversely, a lender’s maximum loan amount may be lower than the sum you’re seeking.
Repayment terms: Use a lender’s loan calculator to determine how different term lengths will impact your monthly payment. Remember that a longer repayment term can help you get a lower monthly payment, but it will result in more interest paid over the course of the loan term.

As you consider different personal loan companies, look for lenders that let you "check your rate" or gauge your approval odds before you apply. This lets you see what rates and loan terms you could potentially qualify for without a hard inquiry on your credit.

FAQ

Where can you get a personal loan?

Check out the personal loans offered by your bank or credit union. It may provide low-interest and unadvertised loans to current customers or members. You can also turn to online lenders, which typically offer competitive loan terms.

What credit score do you need to get a personal loan?

Each lender sets its own approval criteria for personal loans. In general, borrowers with higher credit scores have access to loans with lower interest rates and better terms.

Some popular lenders approve applicants with credit scores as low as 560, which is considered a “poor” and “subprime” credit score by FICO and VantageScore, respectively. Subprime lenders that specialize in loans for people with bad credit may charge high fees and the highest interest rates legally allowed, so proceed with caution if you need a subprime loan.

Is a personal loan installment or revolving?

Personal loans are installment loans that you typically need to repay based on a set repayment schedule.

Is a personal loan better than credit card debt?

Personal loans tend to have much lower interest rates than credit cards, which can make personal loans a preferable borrowing solution for those who plan to carry long-term debt. The Federal Reserve reports that in February 2023, the average interest rate on a 24-month personal loan came in at 11.48%, compared to the average credit card rate of 20.09%.

When should you not get a personal loan?

Don't get a personal loan unless you're sure you can easily afford the monthly payments. And before you take out a loan, review your finances to check if you have a genuine need for the funding. You don’t want to take on unnecessary debt.

Bottom line

Carefully considering your financial situation, credit status and motivation for seeking funds will help you determine which type of loan may best serve your needs.

Once you’ve determined the type of loan you want, compare offers from multiple lenders before deciding on the right one for you.

Sources

ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include: