Different Types of Personal Loans
There are 4 common types of personal loans including unsecured, secured, fixed, variable, and debt consolidation.
If you’ve never applied for a personal loan before, you might think they’re all the same. The truth, however, is that in today’s marketplace, there are several different types of loans available to consumers. And depending on your needs, one type of arrangement is likely to be far more beneficial for you than the others.
If you’re thinking about applying for a personal loan in the near future, you might be wondering what type of loans are there to choose from. Personal loans vary wildly, though repayment terms are usually capped at 12 years and the maximum amount available to borrow is generally limited to $100,000. To help you make an educated decision about which lenders might be best for you, here’s an overview of the most popular types of personal loans and their distinguishing characteristics.
Types of Personal Loans
Unsecured Personal Loans
Among the most common types of personal loans, unsecured loans are lending arrangements with terms based on an individual’s creditworthiness. Most lenders require a borrower to have an average-or-better credit score to get approved for a loan, while only borrowers with exceptional scores will qualify for best rates available. Many lenders exclusively look at the contents of an applicant’s credit report when deciding whether to approve or deny a loan, but some institutions consider additional factors including education and employment. Interest rates with unsecured loans generally range from 5% to 36% with repayment terms spanning from 1 to 12 years.
Secured Personal Loans
Secured loans, which used to be far more common than they are today, involve a borrower using an item of value to provide a lender with insurance that a loan will be paid back on time. For instance, you could use a vehicle, certificate of deposit, or savings account as collateral, which a lender would take possession of if you fail to repay the loan in accordance with the terms. Secured are popular among people with who can’t get approved for unsecured loans, and these loans are generally accompanied by lower rates because there’s less at risk for the lender.
A fixed-rate loan isn’t necessarily an entirely different type of loan from the aforementioned arrangements — it’s more of a feature that’s available in certain situations. When a loan has a fixed rate, that simply means the interest rate, also known as an annual percent rate (APR), assigned to the loan remains constant from month to month. Fixed-rate loans make budgeting easy for borrowers because the predictable payment amount is the same every month.
Unlike fixed-rate loans, the amount of interest charged on variable-rate loans can fluctuate based on outside factors including the federal interest rates. This can be a good or bad for borrowers depending on the timing of their loan, but in general, the interest charged on variable-rate loans is lower than fixed-rate arrangements, and they’re often best for short-term borrowing.
Debt Consolidation Loans
If you’ve racked up a considerable amount of credit card debt over the years, you’re likely receiving a flurry of bills each month each with their own interest rate and due date. For borrowers who find themselves in this situation, a debt consolidation loan can go a long way toward simplifying your finances. Debt consolidation loans involve transferring several outstanding debts into one account that only requires one monthly payment. Ideally, the lender chosen for debt consolidation should offer a lower APR than any of the accounts a borrower is presently paying down.
Applicants who don’t have strong credit or a long enough credit history to qualify for a personal loan on their own may think they’re out of options. However, unqualified borrowers who have a friend or family member willing to help them improve their creditworthiness can stand a good chance of securing a cosigned loan. Cosigned loans are one of the most common types of unsecured loans among young people, who can leverage their parents’ good credit to improve their own. Interests rates and repayment terms are generally along the same lines as most other unsecured loans.
As the name implies, emergency loans are for life’s unexpected interruptions that occur whether or not we’re financially prepared for them. Emergency loans are designed for people who don’t have a savings account or any other funds they can access, but they need money right away to cover unforeseen expenses. Emergency loans can be issued almost instantly, but they almost always have interest rates that are far higher than other loans.
Personal Line of Credit
Personal lines of credit aren’t truly loans in the traditional sense, but most of the time, they’re treated as such. Personal lines of credit are typically issued by banks, and unlike traditional loans, they don’t expire or have set terms. Rather, the repayment options are flexible, and borrowers have the freedom to only withdraw what they need. Interest rates on these loans are almost always variable amounts.
Other Types of Loans
- Payday Loans
A payday loan is a loan someone can lake out to make ends meet until they next get paid. These types of loans have a reputation for being predatory as a result of their astronomical interest rates, which can be more than ten times as high as APRs offered by traditional lenders. Payday loans should be avoided entirely if at all possible, and only used as a last resort.
- Pawnshop Loans
Pawnshop loans are a type of secured loan in which borrowers exchange a personal belonging for a small sum of cash. Usually, with this type of loan, the lender will hold onto the item for a set amount of time, and the borrower must repay the loan (plus interest) within that window. Otherwise, the pawnbroker will attempt to recoup the loan amount by selling the lender’s stuff. Pawnshop loans are known to charge excessive APRs, but not nearly as high as the predatory payday loans.
- Student Loans
To cover the rising cost of tuition, many modern college-age students are turning to banks and online lenders to help pay for their education. In general, student loans have lower APRs than unsecured personal loans, but they are also more limited as they can only be used for educational purposes and funds first disbursed through an institutions financial aid office.
- Business Loans
If you’re seeking funds to get a business idea off the ground, a business loan can help cover many of the associated costs, including office space, equipment, and inventory. Business loans come in all shapes and sizes, with amounts ranging from several thousand bucks to more than $1 million. Most providers of business loans allow the borrower to use the funds for any purpose, but other institutions have certain restrictions regarding how a loan can be spent.
Now you should know what kind of loans are there to choose from, explore the lenders on our site to find the one that’s best for you.