Personal loans could be a wise option if you need to borrow to pay for a large expense or to cover a financial emergency. A personal loan lets you access a lump sum of cash that you can use to cover anything from medical bills to debt consolidation to home repairs.
8 types of personal loans
Personal loans can be categorized differently depending on their purpose and structure. Here are nine basic types of personal loans.
1. Unsecured personal loans
An unsecured personal loan is approved based on the strength of the borrower’s application and doesn’t require collateral, which is something of value that you use to get the loan.
2. Secured personal loans
A secured personal loan requires the borrower to provide collateral upfront to get approved. Collateral can be cash, investments, a home, or a vehicle. If the borrower defaults on the loan, the lender can claim the collateral to offset any potential losses, reducing the lender’s risk.
3. Debt consolidation loans
Debt consolidation loans allow borrowers to combine multiple credit products, often at high interest rates, into a single loan payment. You might take out a consolidation loan to pay off high-interest credit card debt, medical bills, or other debts.
4. Fixed-rate personal loans
When comparing personal loans, it’s always wise to check the interest rates. And it’s important to know whether that rate is fixed or variable.
5. Adjustable-rate personal loans
Adjustable or variable-rate personal loans don’t have a set interest rate; instead, the rate is tied to an underlying benchmark rate.
A cosigned loan has two borrowers. While one person might agree to make the payments, both signers are legally responsible for the debt. Joint loans are also taken out by two people, both of whom are considered to be responsible for the debt.
7. Personal line of credit
A personal line of credit is a little different from a loan. Instead of borrowing a lump sum of money, you get access to a revolving credit line.
8. Buy now, pay later (BNPL) loans
Buy now, pay later (BNPL) is a convenient way to pay for purchases online. Typically, you make one up-front payment toward your purchase, with the remaining balance spread out in installments over three to five weeks.
How to choose the best type of personal loan for you
The best type of personal loan depends on how you plan to use the money, how much you need to borrow, and how good (or bad) your credit is.
When comparing personal loan options, it’s important to do the proper research.
Specifically, that means looking at:
Where to find personal loans
If you’re interested in a personal loan, your current bank or credit union might be the first place to look. Your bank may be willing to offer a relationship rate discount or other incentives if you’ve always been a loyal customer.
Frequently asked questions (FAQs)
What types of lenders grant personal loans?
Banks, credit unions, and online lenders can all offer personal loans. Whether it makes sense to choose one type of lender over another can depend on your personal preferences. Getting a personal loan online, for instance, might be easier and more convenient than going to a traditional bank or credit union.
Which is the best financing option for a personal loan?
The best financing option for a personal loan is ultimately the one that will approve you for the most favorable loan terms. This might be a bank, a credit union, or an online lender. It’s important to understand how your credit score affects your loan options and what kind of loan is best in order to find the right lender.
What is the difference between a cash advance loan and a personal loan?
Cash advance or payday loans advance money to you with the expectation that you’ll repay it in a relatively short time frame. For example, you might get a no-credit-check loan or payday cash advance loan against your next paycheck. On the other hand, personal loans let you borrow a lump sum, which you would generally pay off over months or years.