Types of personal loans

Unsecured personal loans

An unsecured personal loan allows you to borrow without putting up 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.

Unsecured personal loans don’t require collateral, but they’re often harder to qualify for and carry higher interest rates because lenders take on more risk.

How to apply

When you apply for an unsecured personal loan, you'll need to provide personal details like your Social Security number, income, employment information, address and phone number. From there, you can be approved or denied for the loan based on your income, credit history and other factors.

How to qualify

To qualify for the loan, you'll likely need a credit score of at least 580 and a debt-to-income ratio of less than 36%. The higher your credit score, the more likely you are to be approved and the better terms you’ll receive, such as a lower interest rate or larger loan balance.

Who should get one 

You should consider an unsecured personal loan if your credit score is over 700; that’s when you’re likely to get the best terms.

Unsecured loans work best for those with credit scores over 700.

An unsecured loan can still make sense with a credit score under 700 if you're consolidating debt and the new loan offers a lower rate and a simpler payment process.

If your credit score is lower, you may want to consider a secured loan since these are easier to qualify for.

Secured personal 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 your vehicle’s title as collateral.

Examples of collateral include:

• Savings accounts
• Certificates of deposit
• Homes
• Cars
• Stocks
• Insurance policies
• Collectibles

Putting down collateral can get you better loan terms than you would get with an unsecured loan. You may get a lower interest rate, longer term, lower fees and be approved for a larger loan amount. However, if the loan defaults, the bank can seize your collateral to recover its losses.

Consider a secured loan if you have less-than-perfect credit and offering collateral helps you qualify or get better terms than you would with an unsecured loan.

Debt consolidation loans

A debt consolidation loan is when you take the proceeds from the loan and use them to pay off several existing debts.

The goal is to have a lower monthly payment on the new loan than the combined total of your current loan payments, ideally at a lower interest rate. You'll also have fewer bills to manage each month, which can make repayment easier.

Watch for fees, especially origination fees, which usually range from 1% to 8% of the loan amount but can run as high as 10%. These fees are often subtracted from your loan before you receive the funds. That means you could end up with less money than expected and fall short when trying to pay off your existing debts.

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

Stacey, a ConsumerAffairs reviewer from Arizona, used a debt consolidation loan to help with her credit card payments. “It took about a week to receive the funds after I was verbally told my loan was approved but only a couple of days from when I received the approval email. They made payments directly to my credit cards, which was very convenient. I especially like the terms of the loan and that I will be paid off in three years versus five to seven with other lenders.”

Cosigned and joint loans

Cosigned and joint loans both involve multiple applicants, but they work differently.

• A joint loan has two co-borrowers who both share responsibility for the loan and have equal access to the funds.
• A cosigned loan has one primary borrower who uses the funds, while the cosigner simply helps them qualify.

Joint loans are typically best for couples or partners borrowing together for a shared goal. Cosigned loans make sense when the primary borrower doesn't qualify on their own and needs someone with stronger credit or income to help them get approved.

Kyle Enright, president of Achieve Loans, told us, “In a cosigned loan, a cosigner only backs the loan. They are not expected to make payments unless the main borrower misses a payment. If that should happen, they are legally responsible for paying, so they do take on financial risk. Cosigners often have better credit profiles than the applicants, which can help in obtaining a loan and getting the best interest rate.”

It's common for a parent to cosign on a child’s student loan, for example. In both cosigned and joint loans, all parties are legally responsible for repayment. If the loan goes unpaid, it can damage the credit scores of everyone involved.

» MORE: What affects your credit score?

Fixed-rate vs. variable-rate loans

Personal loans can come with either a fixed interest rate or a variable interest rate. The type you choose affects your monthly payment and how predictable your loan costs are.

Fixed-rate loans

A fixed-rate loan has an interest rate that stays the same throughout the loan term. This means your monthly payment won’t change, making it easier to plan your budget.

Fixed-rate loans are best for people who want predictable monthly payments that won’t change with the market.

Variable-rate loans

A variable-rate loan has an interest rate that can go up or down over time because it’s tied to a particular market rate, like the prime rate. When that rate changes, your loan’s interest rate usually changes too.

If rates drop, your monthly payment may go down. But if rates rise, your payments can increase as well.

» LEARN: How interest rates work