A Guide to the Different Types of Personal Loans

In the US, people have $143 billion in personal loan debt. This accounts for 21.1 million personal loans that are currently outstanding. 

Interest rates for personal loans in the US vary from 10% and 28%. This might depend on the types of personal loans used and the borrower’s credit score. 

The reality is that sometimes you need some quick cash that you can get through a personal loan. But personal loans have several different types, which impact the loan terms and what it will cost you as a borrower. 

Wondering how personal loans might vary? Which type of personal loan is the right fit for you? Read on to learn more. 

Unsecured Loan 

An unsecured loan is a very common type of personal loan. When a loan is unsecured, it means there is no collateral attached to the loan. 

Common types of unsecured loans are personal loans, credit cards, and student loans. The borrower is loaned money based on their lending credibility without having security for the lender. 

This means that if you default on the unsecured loan, there’s nothing of yours that the lender could come and take from you to replace their loss. 

In most cases, the unsecured loan will have higher interest rates and lower borrowing limits because there is no collateral connected to the loan. 

Secured Loan

A secured loan, on the other hand, has some form of collateral connected to the loan. For example, when you take out a loan to buy a car, it’s a secured loan. As the borrower, if you default on the loan, the lender could come and take the car back to make up for their loss. 

The same is true for a mortgage when you buy a house. This is a secured loan, with the house acting as collateral for the loan. 

A secured loan will still be based on your credit score and history. Yet, it will typically have higher lending limits because it also has the collateral. 

Installment Loan

An installment loan is a loan where you borrow a set amount of money and then have a specific period to repay the loan. 

You might borrow $5,000 in a personal loan with a 36-month term. This means you’ll repay the lender payments towards the balance and interest over 36 months. At the end of the loan period, the loan is paid off. 

Credit cards, auto, personal, and student loans are installment loans. 

The positive part of an installment loan is that you know exactly what you’ll pay each month over the loan term. However, you can’t change the loan terms or get more money from the loan.

Fixed Rate Loan

One of the things you want to know when you borrow money from a personal loan is the interest rate you’ll be charged for borrowing the loan. 

When you apply for a loan, a fixed-rate loan will establish the interest rate upfront. That interest rate will remain the same for the loan’s entire life.

That interest rate will help to establish your payments due each month. Those payments won’t vary in the amount due because the amount borrowed and the interest you’re paying remain constant. 

A fixed-rate loan can be slightly higher because the lender must attempt to account for what might happen in the market over the loan term.

Variable Rate Loan

A variable rate loan, as the name suggests, comes with an interest rate that can vary over the life of the loan. This means that if the index rate goes down, the rate you’re charged for the loan could be reduced. 

Likewise, if the index rate rises, your interest will increase to address the rising rates. 

While nobody can predict what interest rates will do, taking a variable-rate loan can get you a better rate, assuming the index rate doesn’t shoot up over the loan term. 

Debt Consolidation Loan

A debt consolidation loan is a type of loan that’s used to pay off multiple other loans. You might seek a debt consolidation loan if you have several credit cards, medical bills, or even student debt. 

You borrow enough to pay off the existing debt, then have only one payment for the new loan. Often, you can save on interest costs from multiple lenders when you take out a debt consolidation loan. 

Debt consolidation loans can help a person get ahead and pay off debt. However, they have to be committed to not using the paid-off cards anymore. 

Co-Signed Loan

As a borrower, your ability to get a loan will depend on your credit score and history. If you go to get a loan and don’t have strong credit, if you’re given a loan, it will cost more in interest. 

One way to get around this scenario is to have someone with solid credit co-sign the loan for you. This means you’re borrowing the money. But the co-signer vouches for your creditworthiness. 

Their good credit helps make the lender feel more secure about loaning money. 

When you ask someone to co-sign a loan for you, you must know that if you default on the loan, both of your credit scores are impacted. 

Online Personal Loan

You can get unsecured personal loans from a variety of sources. You can go to your existing brick-and-mortar bank or credit union. They’re likely to have high standards for lending, so anyone with less-than-perfect credit might not be approved. 

Many borrowers will seek out personal loans from online lenders. You can simply search for online personal loans and have a long list of options.

It’s essential to know these lenders are not all created equally. You may get greatly varying loan terms from one lender to another, so it makes sense to do your homework and shop around.  

Personal Line of Credit

A personal line of credit is a type of personal loan. You’re borrowing money based on your own creditworthiness.

However, you don’t borrow a set amount of money. Instead, the lender approves you for a specific amount which you can borrow from when needed. 

So, instead of being given one lump sum, you take the money from the personal line of credit as needed. You only pay interest on the amount you’re currently borrowing, not what you could borrow. 

A credit card is a personal line of credit, in essence. The credit card company tells you your limit based on your credit score. You can use up to that amount on the card. 

Payday Loan

Another type of less favorable personal loan is a payday loan. It could also be considered an installment loan of sorts. 

Many people find themselves short on cash, and they can’t make it to their payday. They take out a payday loan, meaning they borrow ahead on an amount from their paycheck. 

Payday loans can come with high-interest rates and open a cycle of borrowing that can be tricky to get out of if the borrower isn’t careful.

Credit Card Cash Advance

Another type of personal loan is taking a cash advance from a credit card. The credit card company has already established your limit or credit line. 

You take cash and put it on the balance of your credit card. This is a personal loan of sorts since you’re taking cash, and the amount you can take is based on what credit line is approved with your credit card. 

You should know that this might be the option to use when it’s an emergency or you don’t have other options. Since the interest rate you pay for cash advances is often much higher than what you’d pay for regular purchases using your credit card. 

Choosing the Best Personal Loans

If you need a personal loan, you want to shop around and consider your options. With so many different ways to get a personal loan, you want to find the loan that will work best for your financial situation. 

What criteria should you use in deciding what loan is right for you? Consider things like:

• The interest rate on the loan
• Loan terms, including how long you have to pay it off
• Application fees?
• Origination fees?
• Does the lender allow for an early payoff without penalty?

Be sure to consider what other borrowers are saying about their experiences. Consider what kind of customer service is available from the lender and how easy it is to make payments on the loan.

Understanding the Types of Personal Loans to Get the Best Option

With so many types of personal loans, it’s essential to understand how each is different and how that will impact you as a borrower. Many of these loan types overlap, which can impact the loan’s cost. 

If you’re searching for an easy personal loan, we can help. Check out our personal loan services today.