6 types of personal loans (and how they can help you)

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

There are six main types of personal loans. It’s helpful to know the differences so you can understand which is right for you and your unique financial situation.

• Unsecured personal loans
• Secured personal loans
• Variable interest loans
• Fixed-rate loans
• Personal lines of credit
• Debt consolidation loans

Unsecured personal loans are installment loans. This means you’ll borrow an amount of money and repay it in fixed monthly payments, with interest, until it’s paid off.

Unlike other types of installment loans such as auto and home loans, unsecured personal loans don’t use the item you’re purchasing as collateral.

Instead, lenders give these based on your creditworthiness. Lenders will look at your credit score, income and debt-to-income ratio to determine if you qualify.

Pros

• No risk to personal property
• Repayment terms range from one to seven years
• Involves a simple application process

Cons

• Higher interest rates that range from 5 percent to 36 percent
• Must have good credit to qualify
• Usually only available in smaller amounts

Secured personal loans give lenders ownership toward an asset. This makes it collateral, meaning if you don’t repay the loan in time, the lender can collect the asset to make up for unpaid funds.

Because lenders can seize collateral in exchange, there’s less risk for them. This makes secured loans easier to qualify for, even if you don’t have good credit. Secured loans can be costly for borrowers because of this.

Pros

• Lower interest rates
• Easier to qualify for with a lower credit score

Cons

• Offering an asset as collateral to the lender means higher risk for you as the borrower
• Shorter repayment terms and higher monthly payments

With a variable interest loan, your interest rate may change as market interest rates change. This will affect your monthly payments, given they’re mixed with principal and interest.

Some lenders give variable interest loans with a line of credit. This means the lender will approve you to borrow up to a certain amount.

Pros

• Lower starting interest rates
• Preferred if you plan to repay in 10 years or less

Cons

• Interest rates may increase over time
• Unpredictable and harder to budget

The majority of personal loans are offered with fixed rates, so the interest rate and payment will remain steady over time. This works best if you like to budget with consistent payments each month. With a fixed-rate loan, your payment will not change over time.

Pros

• Predictable monthly payments
• Easier to budget

Cons

• Higher interest rates

Lenders offer lines of credit, secured or unsecured, to borrowers that have met the credit requirements. It’s typically revolving credit, meaning it doesn’t have a fixed number of payments.

As a general rule, do not use a personal line of credit for expenses that you need to pay off over a longer term. Similar to a credit card, you pay interest only on what you borrow. If you happen to meet the requirements set by the institution, you may not have to offer collateral.

Pros

• Added flexibility
• Pay interest only on what you borrow
• Best for ongoing expenses

Cons

• Must have good credit score to qualify
• Running up a high balance can hurt your credit
• May have annual and/or monthly fees

A big reason many people take out a personal loan to begin with is to consolidate debt. This can include credit card bills, other loans or miscellaneous bills and medical expenses.

With a debt consolidation loan, you roll all of your debts into one loan and make one payment with one interest rate. These loans are easier to qualify for and have higher interest rates. You can also save on interest if your new loan has a lower APR than your existing loans.

Pros

• Easier to qualify
• Usually lower APR than your existing loans
• Simplifies the process of repaying debt

Cons

• Higher interest rates
• May have fees
• Missing a payment can further hurt your credit

To begin the application process, make sure you have proof of income and check your credit. Understanding where your credit is at can help you determine whether or not you’re likely to get approved for a loan. It can also give you an idea of what your interest rate will look like.

Even if you have bad credit, you may still be able to get a personal loan. You may have to get a cosigner. You also have to understand that your interest rate will be higher and that your lender of choice may not work with you, so you may have to go with someone else.

Once you have the information you think you need and are comfortable with your credit, it’s time to find a lender.

Personal loans can be used for just about anything, but some of the big reasons include:

• Consolidating credit card debt. Doing this can save money on interest since interest rates for personal loans tend to be lower than credit card interest rates. It can also be easier to consolidate multiple credit card payments into one payment.
• Covering emergencies that require extra cash, such as an emergency visit to the doctor or unexpected car repairs.
• Renovating a home, paying for a wedding or honeymoon or making big purchases of things like home appliances.

In some situations, you can even use a personal loan to improve your credit. This is a good option if you have accumulated a good amount of credit card debt and don’t think you can manage repayment on your own, in a reasonable amount of time.

Personal loans differ from credit cards because:

• They come with a fixed payment plan (also known as an installment account).
• They’re paid off in a specific time frame, usually about two to five years.
• Lenders offer personal loans based on your credit score, employment status and income.

Depending on your credit score, your interest rate will vary—usually somewhere between 6 percent and 36 percent. If you decide to apply for a personal loan, you’ll want to make sure your credit is in as good of shape as possible so that you get a lower interest rate

You will benefit from understanding the types of personal loans available to you and their requirements before applying for any personal loan. We would also recommend taking steps like completing Lexington Law Firm's free credit assessment to get a better understanding of where your credit is at.

Reviewed by Sarah Raja, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Sarah Raja was born and raised in Phoenix, Arizona. In 2010 she earned a bachelor’s degree in Psychology from Arizona State University. Sarah then clerked at personal injury firm while she studied for the Law School Admissions Test. In 2016, Sarah graduated from Arizona Summit Law School with a Juris Doctor degree. While in law school Sarah had a passion for mediation and participated in the school’s mediation clinic and mediated cases for the Phoenix Justice Courts.

Prior to joining Lexington Law Firm, Sarah practiced in the areas of real property law, HOA law, family law, and disability law in the State of Arizona. In 2020, Sarah opened her own mediation firm with her business partner, where they specialize in assisting couples through divorce in a communicative and civilized manner. In her spare time, Sarah enjoys spending time with family and friends, practicing yoga, and traveling.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.