Personal loans may be secured or unsecured, fixed rate or variable rate. Additional types of loans include debt consolidation loans, co-signed loans, personal lines of credit, payday loans, credit card cash advances, and pawnshop loans.
Types of Loans
Let’s dive right in and take a closer look at each type of most common personal loans out there.
1. Unsecured Personal Loans
Unsecured loans are not backed by any collateral (valuable personal possessions such as a car or a house.) They can be appealing to borrowers because, if a borrower defaults on an unsecured loan (meaning the borrower fails to pay back the money owed to the lender), the lender cannot seize any of the borrower’s assets as compensation. For this same reason, however, lenders consider unsecured loans riskier than secured types of loans, and they usually charge higher interest rates and high penalties for late payments as a result. Typical interest rates for unsecured personal loans range from 5% to 36%, and repayment terms are generally between one and seven years.
2. Secured Personal Loans
Secured loans are backed by collateral, valuable personal property which can be seized by the lender if the borrower defaults on the loan. Secured personal loans can be taken out against a car, a house, personal savings, or some other asset. Home mortgages, home equity loans, and home equity lines of credit (all secured by a house) and vehicle loans (secured by a car) are examples of secured personal loans. Lenders consider secured loans less risky than unsecured loans, so they usually offer larger loans at lower interest rates. Secured personal loans are also easier to obtain than unsecured loans for this reason.
3. Fixed Rate Loans
Fixed rate loans offer a fixed, unchanging interest rate for the entire term of the loan. This means that the monthly payments on the loan remain constant, making it easier for borrowers to budget for loan repayment. Lenders may charge extra fees on fixed rate loans, though, if borrowers want to make extra payments to bring the loan balance down more quickly.
4. Variable Rate Loans
The interest rate on variable rate loans fluctuates throughout the loan term, based on a benchmark rate set by the lender. This means that monthly payments can vary, and total interest over the life of the loan can be difficult to predict, making budgeting more difficult for borrowers. Short-term variable rate loans often offer borrowers lower interest rates than fixed rate types of loans without too much uncertainty, since the loan term is brief.
5. Debt Consolidation Loans
A debt consolidation loan combines multiple debts into a new, single loan. It offers the advantage of simplified payments with a single, fixed monthly payment, and lenders typically charge lower interest rates for consolidation loans than for other types of loans. Transfer fees usually apply when loan balances are transferred into a debt consolidation loan, and the interest rate of the consolidated loan depends on the borrower’s credit. Consolidating debt won’t necessarily reduce the amount owed or speed repayment, but consolidation may simplify payments and offer savings on interest.
6. Co-signed Loans
Would-be borrowers with little or no credit history may have trouble qualifying for loans. Co-signed loans offer one good solution to this difficulty: a co-signer with good credit promises to be responsible for repayment of the loan if the borrower defaults. This arrangement not only makes it easier for borrowers to qualify for loans, it often prompts lenders to offer lower interest rates.
7. Personal Lines of Credit
A personal line of credit is structured more like a credit card than like other types of personal loans. Rather than borrowing a lump sum, with a personal line of credit the borrower takes out only as much money as needed, when it is needed, up to a predetermined limit, and only pays interest on the amount borrowed. This can be a good option for borrowers who need smaller quantities of cash than are available in typical loans. Personal lines of credit often have variable rates and are available in both secured and unsecured formats.
8. Payday Loans
Payday loans are short-term loans named for their typical repayment on the borrower’s next payday. They are unsecured and therefore high risk to lenders, who charge extremely high interest rates as a result. Interest rates on payday loans can be as high as 500%. Most payday borrowers take out only small sums, typically a few hundred dollars, but the high interest rates can make payday loans difficult to repay without getting trapped in a cycle of ever-increasing debt.
9. Credit Card Cash Advances
A credit card cash advance is a short-term loan taken out against the borrower’s credit card. Cash advance interest rates are higher than rates for credit card purchases, and lenders also charge cash advance fees, usually a percentage of the amount borrowed. Cash advances can be convenient for borrowers who already have credit cards, but they do cost more in interest and fees than most other types of loans.
10. Pawnshop Loans
A pawnshop loan is a type of secured personal loan, borrowed against a personal asset such as jewelry. The asset is left with the pawnshop as collateral, and sold if the borrower defaults on the loan. Interest rates on pawnshop loans are as high as 200%, though typically not as high as rates on payday loans. Though the borrower risks losing any assets used to secure the loan, default on a pawnshop loan will not damage the borrower’s credit or bring debt collectors calling.
How much you need to borrow and for how long, your credit history, and your preferred repayment terms are things you need to consider in order to find a personal loan that best fits your needs.