Types of Personal Loans

The world of personal loans is a vast one. Do you need fast funds for an emergency, or do you want a low-interest rate loan you can gradually pay off in the next ten years? Are you a student who wants to afford tuition, or a business owner seeking financing?

Knowing the different available options out there can help you pick the one that suits your needs best. Here’s what you should know about the types of personal loans.

Secured Personal Loans

If you want to take out a secured personal loan, you need to put up assets as collateral. Lenders will accept cash assets, property, vehicle titles, collectibles, and other valuables.

Compared to unsecured personal loans, secured ones are easier to get. However, they are also considerably riskier since the lender will be able to keep the collateral if you default on your loan.

Recommended credit score: Any credit score is considered

Typical interest rate: 3% - 6%

Common uses: Purchasing a house; financing a car

Pros: Easier to obtain

Cons: You need to offer up valuable assets as collateral, which may be taken by the lender if you default on the loan

Unsecured Personal Loans

Unlike secured personal loans, unsecured ones don’t require the borrower to put anything up as collateral when applying for the loan. Unsecured loans are generally harder to obtain than secured loans because there is a higher risk for the lender. Still, there are risks associated with unsecured personal loans.

If you default on an unsecured personal loan, no assets will be immediately repossessed by the lender. However, they will send your information to a debt collector who will make attempts to get you to repay the loan. This may involve taking you to court and getting a judge to rule on the case.

Recommended credit score: 600+

Typical interest rate: 11% - 30%

Common uses: Anything except a few exceptions, such as business expenses and property down payment

Pros: Fast funds; lower risk for the borrower

Cons: Higher interest rates; higher credit score requirement

Fixed-Rate Personal Loans

Fixed-rate personal loans have fixed annual percentage rates (APRs). This means that the rate doesn’t fluctuate based on a variable index over the course of the loan. The APR includes interest as well as additional fees and charges.

Fixed-rate personal loans can make repayment costs more predictable and manageable. Borrowers who want a clearer idea of how much to budget for their loan repayment each month may benefit from choosing a fixed-rate loan over a variable-rate one.

Recommended credit score: 600+

Typical interest rate: 6% - 36%

Pros: Predictable monthly payments

Cons: Interest rate will not reflect market conditions even if they would make it lower

Variable-Rate Personal Loans

Also known as variable APR loans, variable-rate personal loans use an interest rate that changes based on a variable index rate. Compared to fixed-rate personal loans, variable-rate personal loans are more unpredictable. The interest rate can fluctuate based on numerous factors, such as market conditions. This means you can expect to pay a different installment amount each month.

Lenders usually choose to use the prime rate from the Federal Reserve to determine their variable-rate APRs.

Recommended credit score: 600+

Typical interest rate: Varies

Common uses: A relatively small purchase that you can pay back soon

Pros: Short-term loan with low interest rates

Cons: More unpredictable monthly payments

Debt Consolidation Loans

Many individuals with debt choose to consolidate it by taking out a personal loan. Debt consolidation loans can help borrowers pay off their existing debt faster.

For those with multiple debts, it can be confusing to stay on top of each individual payment. Many find it easier to combine all their debts into one by obtaining a debt consolidation personal loan.

Another potential benefit of taking out a debt consolidation loan is that you might be able to get a lower interest rate than what you’re paying for your existing debts. Some people are able to hundreds if not thousands of dollars in the long run by opting for this kind of loan.

However, remember to be wary of the debt cycle. Consolidating debt can be helpful, but without necessary spending changes, it can still be difficult to pay off the debt consolidation loan itself.

Recommended credit score: 580+

Typical interest rate: 6% - 36%

Common uses: Paying back other debts; streamlining debts by combining them

Pros: Can help you save money; reduce debt interest

Cons: Have a risk of the borrower getting stuck in a cycle of debt and loans

Home Improvement Loans

Home renovation is a great, and sometimes necessary, way to improve your quality of life or the value of a property. However, home remodeling projects can be costly. Homeowners can overcome the expenses by obtaining a home improvement loan.

A home improvement loan is an unsecured personal loan that is specifically meant to help you cover expenses related to home upgrades and repairs. If you are approved for a home improvement loan, you will receive a lump sum amount of money that you will then need to repay over the next few years.

It’s important to know the difference between home improvement loans and equity financing. A home improvement personal loan is unsecured and generally has higher interest rates.

Meanwhile, a home equity loan is also called a second mortgage: it’s secured. This means that the lender can foreclose on collateral (in this case, the property) if you fail to make your payments.

Recommended credit score: 660+

Typical interest rate: 6% - 36%

Common uses: Home improvement

Pros: No need for collateral; lower risk than a home equity loan

Cons: Big credit impact if you fail to repay

Medical Loans

With how expensive health care can be, it’s common for people to take out medical loans in order to afford essential medical care and procedures. Surgical operations, for example, often require urgent funds and medical loans can help borrowers pay for the necessary procedures in a timely manner.

When taking out a medical loan, it’s important to consider the terms of the loan and be aware of the cost and fees as determined by the lender. A majority of medical loans are functionally the same as general-use, unsecured personal loans, though medical loans may have less strict credit score requirements.

If there is time, it is generally advisable to look into multiple medical loan options that are available to you to compare and see which one might suit your needs best. This is because the interest rate for a medical loan can be quite high, and repayment plans are not always the most flexible.

Recommended credit score: 580+

Typical interest rate: 9% - 35%

Common uses: Paying for medical expenses

Pros: Gives access to important medical treatments; good for emergencies

Cons: High interest rates; limited flexibility

Wedding Loans

Planning a wedding can be exciting–it’s a time for people to flex their creative muscles and create a personalized, meaningful experience. Unfortunately, wedding costs are often daunting.

Wedding loans are unsecured and serve to help couples take on wedding-related expenses, such as the venue, catering, gowns, wedding rings, and photography. They can help pay for a more luxurious and higher-quality wedding event.

Taking out a wedding loan might help partners who want to finance a wedding ceremony without getting into credit card debt. However, it’s a good idea to consider alternatives to obtaining an unsecured loan, because failing to repay a wedding loan can result in debt collectors taking you to court.

Recommended credit score: 600+

Typical interest rate: 6% - 36%

Common uses: Wedding expenses

Pros: Can help couples finance their dream wedding

Cons: Higher interest rates; there is usually an income requirement

Student Loans

Many people cannot afford the high prices associated with going to college. To finance their higher education, they might want to turn to student loans, which can help pay for tuition, living expenses, books, and additional fees.

There are two kinds of student loans: federal student loans and private student loans. A federal loan is government-issued and instead of credit requirements, there are specific eligibility criteria. On the other hand, private student loans are similar to unsecured personal loans–they are offered by banks, credit unions, and other lenders.

Federal student loans offer the option of deferred payments, which means that you are allowed to postpone your repayment plan until you have graduated or been employed. These loans typically have low, fixed-rate interest, making it potentially easier to handle than private loans.

Private student loans are easier to qualify for since they don’t come with stricter eligibility requirements. However, they can have higher interest rates and rigid repayment terms, making them more difficult to pay back over the life of the loan.

When deciding on whether you should take out a student loan, it’s essential to weigh the pros and cons. It’s also advisable to consider your plan for repayment, which may include thinking of your plans post-graduation. Alternatives to student loans exist, such as grants, scholarships, work-study plans, and other ways to relieve the financial burden on students.

While there have been discussions of student loans being forgiven en masse, forgiveness is still undetermined as of the writing of this article.

Recommended credit score: 650+ for private student loans

Typical interest rate: 4% - 10%

Common uses: Paying off student tuition

Pros: Access to higher education; low interest rates; deferred payments

Cons: Significant debt that can take many years to pay off; potential negative credit impact if you don’t make on-time payments

Personally Guaranteed Business Loans

Unlike personal loans, personally guaranteed business loans allow you to use the funds for business expenses. A borrower who owns a large amount of a business (usually at a minimum of 20%) can personally guarantee that even if the business defaults, the borrower agrees to be responsible for the rest of the unpaid loan. Any assets that were put up for collateral for this secured loan may also be seized by the lender.

Essentially, this means the lender can sue the business owner who made the guarantee, holding them personally liable for any unpaid balance. Since business loans are typically fairly generous, in the tens of thousands, it can be difficult for some borrowers to pay off the debt if the business is not lucrative. It’s important to be aware of your options and market if you are seeking a loan for business purposes.

Personally guaranteed business loans are often sought after by small business owners and startups that want to secure funds for their businesses. Compared to Y Combinator and other business accelerators, a personally guaranteed business loan may be more accessible to obtain, and may make it easier for a business to find success.

Recommended credit score: 680+

Typical interest rate: 5% - 13%

Common uses: Used by small business owners to finance their commercial operations

Pros: Can help a business pay for expenses

Cons: Often has high credit score requirement; high risk for the person who agrees to be held liable for the loan; requires collateral

How do I know which personal loan type is best for me?

Some personal loans are for general use, others are for specific purposes. It’s a good idea to consider both broad and narrow options to compare interest rates and APRs. Since everyone’s situation is different, and each lender has their own terms and conditions, there is no singular best personal loan type.

Some things to ask yourself when considering a personal loan are:

• How urgently do I need this loan?
• What is the purpose of these funds?
• With this interest rate, how much will I need to repay each month?
• Is my credit score good enough for an unsecured personal loan?
• Are alternatives (e.g. using a credit card or saving up over time) better options?

In addition, keep an eye out for predatory practices some less reputable lenders may use when people apply for or default on a loan. A common red flag is a lender who guarantees a loan no matter what. Another thing to watch out for is if a debt collector uses harassment or threats to get you to repay the loan.