Types of Personal Loans: What Options Are Available?

Credit
Updated: 23rd Nov 2021
Written by Elijah Bishop
Share this article
AmeriSave Mortgage Review
AmeriSave Mortgage Review: Rates, Fees, & Terms
Ally Bank Mortgage
Ally Bank Mortgage Review: Rates, Terms, & Fees
Credit
November 23, 2021
Written by Elijah Bishop

Disclaimer: This post contains references to products from one or more of our advertisers. We may receive compensation (at no cost to you) when you click on links to those products. Read our Disclaimer Policy for more information.

If you’re in the market for a personal loan, one thing you’ll notice is the availability of several types of personal loans.

In your quest for a personal loan, you will come across personal loans with diverse eligibility requirements, loan fees, and interest types. Understanding the different types of personal loans at your disposal and what they offer can help you choose the right personal loan.

This article will go over some of the major types of personal loans and their pros and cons, respectively.

>> More: Best Personal Loans

Different Types of Personal Loans

#1. Unsecured Personal Loans

Most personal loans are unsecured loans. When we say they are unsecured, the loan isn’t backed by collateral, unlike mortgage loans. These types of personal loans come with a higher interest rate and high credit score.

Pros:

  • Good option if you don’t have any assets
  • Unsecured loans typically have lower interest rates than credit cards

Cons:

  • High fee penalties for late payments
  • The lender may take possible legal action if you default on the loan
  • Most providers charge higher fees and interest rates compared to a secured loan

#2. Secured Personal Loans

Unlike unsecured loans, a secured loan needs collateral — like your home or vehicle to “secure” or take out the loan. So, if you default on the loan, the lender may seize the asset you put up as your collateral. Most home loans and car loans are secured loans.

Pros:

  • Lower interest rates and fees because the lender has less risk
  • Secured bank loans are easier to obtain from reputable lenders

Cons:

  • If you default on the secured loan, you could find yourself without a car or roof over your head. The lender will sell any particular asset to recover any money

#3. Fixed-Rate Personal Loans

Fixed interest means that the rate is locked in over the life of your personal loan. As the interest rate will not change, it makes budgeting a whole lot easier. This is common with installment loans like student loans, car loans, and even personal loans.

Pros:

  • Avoid the stress of rate rises
  • Repayments remain the same throughout the term of the loan, making financial planning easier

Cons:

  • Generally higher rates and fees than variable-rate personal loans
  • Miss out on low-interest rates if market rates fall

#4. Adjustable-Rate Personal Loans

With an adjustable-rate or variable rate personal loan, the interest rate can change at any time during the term. As the interest rate fluctuates, the repayments on this type of loan will go up and down.

Pros:

  • Lower rates and fees compared to fixed interest personal loan
  • If interest rates decrease, your repayments will be less

Cons:

  • Difficult to budget as repayments vary according to the changing rates
  • When interest rates rise, so does your payments

#5. Debt Consolidation Loans

This type of personal loan rolls multiple debts into a single new loan. Combining all your debts into one personal loan allows you to save on interest repayments and easily make payments.

Pros:

  • It helps you pay off all your debts faster with a competitive rate
  • One regular payment as opposed to several throughout the month

Cons:

  • Chance to fall into more debt, easy to slip back into bad spending habits

#6. Co-Signed Personal Loans

This type of personal loan is for borrowers with a poor or no credit history who may not qualify for a loan independently. The co-signer acts a surety and promises to pay the loan if the borrower defaults on the loan repayment. Adding a co-signer who has strong credit and financial history can improve your chances of getting approved for a personal loan.

Pros:

  • Easy to qualify for due to the co-signer
  • Due to the high creditworthiness of the co-signer, you can receive a lower interest rate

Cons:

  • Both you and your co-signer are responsible for the loan. If you default on the loan, both your credit and that of the co-signer will receive a negative hit.

#7. Personal Line of Credit

A personal line of credit is revolving credit, more like a credit card than a personal loan. Rather than getting a lump sum of cash, you get access to a credit line from which you can borrow on an as-needed basis. You pay interest only on what you borrow.

Pros:

  • Interest incurred only on funds borrowed
  • Flexible repayment options
  • Constant access to funds
  • Lower average APR than credit cards
  • Unsecured credit lines risk no collateral

Cons:

  • With easy access to money from a line of credit, you may get into serious financial trouble if you don’t control your spending
  • If interest rates increase, you may have difficulty paying back your line of credit

#8. Payday Loans

Payday loans are short-term unsecured loans, usually up to $500 to cover expenses until your next payday. These loan terms are typically only two to four weeks. These may leave borrowers in a debt cycle where they wind up taking out new loans to pay off their current debts. At Simplemoneylyfe, we do not encourage our readers to take out payday loans due to their exorbitant interest rates.

Pros:

  • You can get the money you need to meet short-term expenses.
  • The process is quick and relatively easy.
  • The loan is typically automatically paid off with a post-dated check tied to your next pay period, so you don’t have to go through any effort to repay it.
  • There are almost no underwriting requirements aside from having a paycheck to repay the loan, so you will likely be approved.

Cons:

  • That amount is anywhere from 13 to 26 times the interest rates typically found on credit cards.
  • If you need one payday loan to make ends meet, what happens to your situation when that loan is paid back at your next paycheck?
  • 70 percent of payday loan users end up using them for recurring expenses, according to Pew Research.
  • The average borrower pays $520 in fees to borrow $375.

>> More: Best Online Payday Loans

#9. Pawnshop Loans

A pawnshop loan is a secured personal loan. You borrow against an asset, such as jewelry or electronics, which you leave with the pawnshop. If you don’t repay the loan, the pawnshop can sell your asset. Rates for pawnshop loans are very high and can run to over 200% APR.

Pros:

  • Quick funding since you can walk into any pawn shop and get the required funds in a few minutes.
  • You don’t need good credit (or any credit, in fact) to get a loan. And if you don’t pay, you also won’t see a hit to your credit score.
  • No hassles from creditors if you don’t pay. If you default on the loan, the pawnbroker claims ownership of your pawn and sells it to recoup the cash.

Cons:

  • They can be pretty expensive compared to a traditional personal loan.
  • Loans are very small since the average pawn loan is $150 and lasts 30 days, according to the National Pawnbrokers Association
  • If you lose your pawn ticket, you won’t be able to get your pawn back. If you don’t pay the loan off by the due date, you could lose your pawn too.
  • Since pawn loans don’t report to the credit bureaus, they won’t help you build credit.

#10. Cash Advances

You can use your credit card to get a short-term cash loan from a bank or an ATM. It’s a convenient but expensive way to get cash. Interest rates tend to be higher than those for purchases, plus you’ll pay cash advance fees, which are often either a dollar amount (around $5 to $10) or as much as 5% of the amount borrowed.

Pros:

  • Provides quick access to unsecured funds—no collateral required
  • Easy to get—no underwriting or credit check involved

Cons:

  • Extremely high APR and fees
  • No grace period—credit card cash advances begin accruing interest on day one

#11. Credit Builder Loans

Credit builder loans designed to help you rebuild your credit or help you gain credit for the first time. Depending on the lender and the terms, they might be secured with a savings account, or they might even be unsecured. Your credit score improves as you make timely payments, opening you to other financial opportunities and savings.

Pros:

  • Easy to apply for
  • The result, a higher credit score, means you will be much more likely to be approved for credit cards, loans, a mortgage and receive better interest rates.
  • It can help you develop more disciplined habits when it comes to making regular payments and saving money

Cons:

  • They are not free. You will have to pay interest and likely set up fees
  • Late or missed payments will be reported to the credit bureau as well and hurt your credit score

#12. Wedding Loans

Like vacation loans, these are generally unsecured and meant for a specific purpose. Weddings can be expensive, and coming up with the cash for one can be challenging. A loan can help smooth the way, especially if you have good credit and get a low-interest rate.

#13. Vacation Loans

In general, vacation loans are unsecured. You can get one of these loans to go on a trip and see new things. However, the downside is that now you might spend several months—or even years—repaying it.

#14. Medical Loans

A medical loan is an unsecured personal loan that covers health care costs. They can be used to consolidate existing medical debt, cover emergency or planned medical procedures like dental work or plastic surgery, or pay for high deductibles and out-of-network charges.

Ways You Can Use a Personal Loan

Unlike other types of loans, a personal loan can be used for any purpose. From home buying, medical needs to home improvement, the uses of a personal loan are numerous. However, below are the common ways you can use a personal loan.

  • To pay off a high-interest debt
  • To cover medical expenses
  • To make home improvements
  • To respond to emergency financial needs
  • To cover moving costs
  • To pay for weddings and vacations

Bottom Line: Types of Personal Loans

A personal loan can help you get the money you need for different purposes. However, anytime you borrow money, you need to be careful.

Only borrow what you need and try to pay off the debt as quickly as possible to reduce what you’ll pay in interest.

Keep Reading:

Elijah Bishop
Elijah Bishop
Elijah A. Bishop has been writing about real estate and mortgage for years. He has a degree in English, Media and Creative writing from the University of Georgia. He also holds a realtor license and has been in and out of the US mortgage industry as a Loan originator.