Types of Personal Loans: A Comprehensive Guide

If you need to borrow money, you can consider applying for a personal loan. You can use a personal loan for all sorts of things, but with the different types of personal loans it can be difficult to know which one to use for different purchases.

What is a personal loan?

Types of personal loans

HAS personal loan is a flexible loan that you can use for a variety of purposes. Unlike loans intended for a specific matter, e.g mortgage gold car loanhas a personal loan can be used for almost any legal purpose.

There are different types of personal loans. One of the most basic differences is between secured and unsecured personal loans.

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Personal loan without collateral

Unsecured personal loans are one of the most common types of personal loans and most of the personal loans you see advertised will fall into this category.

An unsecured personal loan does not require any collateral. The lender offers the loan purely on the basis of your credit history, financial situation and promise to repay the loan. This is in contrast to secured loans, such as mortgages, where the asset serves as collateral for the loan.

The obvious advantage of unsecured personal loans is that you don’t have to have anything of value to offer as collateral. You also don’t have to go through the process of having the lender examine your collateral to make sure it has enough value to secure your loan, which can speed up the loan process.

However, since there is no collateral, lenders are more selective in offering these loans. To qualify for these loans, you will need strong credit and your interest rate will be higher than it would be with a secured loan.

👉 More information: Find out exactly what documents and information you need to apply for a personal loan with our comprehensive guide.

Secured personal loan

Secured personal loans are the opposite of unsecured personal loans. When you apply for one of these loans, you must offer some form of collateral.

Many lenders will accept a certificate of deposit (CD) or savings account balance as collateral for these loans. For example, if you have $5,000 in CDs at a bank, that bank may offer you a secured loan. The size of the loan you can qualify for will depend on the value of your collateral and your credit score.

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Since you are offering collateral to secure the loan, secured personal loans are generally easier to qualify for. Many lenders will also offer lower interest rates on these loans because of the reduced risk they face.

The main disadvantage of secured personal loans is the fact that you have to have something of value to serve as collateral. If you need a loan, chances are you don’t have a lot of savings available and maybe not enough to serve as collateral.

Offering something as collateral also puts it at risk. If you are unable to repay your loan, the lender could take over the collateral.

It may also take longer to get a secured loan because the lender has to assess your collateral to make sure it has enough value to secure the debt.

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Brand personal loans

If you are shopping for personal loans, you may find that some lenders offer specialist or branded personal loans. For example, you may see loans described as vacation loans, home improvement loans or debt consolidation loans.

These loans are advertised as special types of personal loans for a specific purpose. Some of these loans may offer special features related to their branded purpose. For example, if you apply for a debt consolidation loan, the lender can pay your other creditors directly, so you don’t have to deal with the money at all.

Keep in mind that personal loans are highly flexible. You can use a personal loan for almost any purpose; the few that most lenders don’t allow are things like paying for education, gambling, or illegal activities.

Some branded personal loans can be a good deal. You may find a personal debt consolidation loan that can help you save a lot of money. However, just because a loan is described as good for a particular purpose does not mean it is the best loan available. Always shop around and consider generic personal loans before committing to a branded one to make sure you’re getting the best deal.

Personal loans with bad credit or no credit check

Another common thing when looking for personal loans is a loan advertised as a personal loan with bad or no credit check. These can seem appealing, especially if you don’t have a great credit score or have had trouble getting approved for loans in the past.

As with everything, you pay a price for these types of loans. Lenders who are willing to offer loans to people with bad credit or without checking people’s credit must somehow compensate for this risk. They often compensate this risk with highly unfavorable terms such as high interest rates or large origination fees.

If you need a personal loan but don’t have good credit, you should avoid these loans because of their predatory terms. You will get a much better deal if you qualify for a secured personal loan. If you don’t have enough assets to serve as collateral, you’re probably better off spending some time working on improving your credit and applying for a traditional personal loan instead.

👉 More information: Learn step-by-step process of securing a personal loan with a co-signer in our comprehensive guide.

Payday loans

Payday loan is a type of loan with bad credit or no credit check. They share some characteristics with personal loans, but it is important to know that payday loans are highly predatory and should be avoided whenever possible.

Just like bad credit or no credit check personal loans, lenders usually don’t look at your credit score when you apply for a payday loan. These loans have massive fees High interest rates and short repayment periods. For example, if you get a payday loan today, you can expect to pay it back within 2 weeks. The idea is that you use the loan to get you to your next paycheck and use the next paycheck to pay off the balance.

Payday loans usually come from specialized lenders, so if you’re looking for loans from reputable banks and online lenders, you probably won’t find them. Their high fees and interest rates can make it easy to get trapped in a cycle of debt, so try to avoid these loans except as a last resort.

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Other types of consumer loans

Personal loans are a type of consumer credit, which is a broad category of loans that describes almost any type of loan that the average person could apply for. Some examples include personal loans, mortgages, car loans and Credit Cards.

When you want to borrow money, it’s important to make sure you’re applying for the right type of loan. Certain types of purchases, such as a home or car, have unique types of loans designed specifically for those purchases. Trying to use a credit card or personal loan is likely to result in you paying more than if you were to use a specially designed loan.

Personal lines of credit

Personal lines of credit are similar to personal loans in many ways. Like personal loans, they are highly flexible and can be used for many different purposes. They can also come in secured and unsecured variants.

The difference is that a line of credit is a pool of funds that you can draw on multiple times, while a loan is a lump sum of cash that you can access only once.

This makes personal lines of credit more useful for people who have unpredictable financial needs. If you have a one-time expense and you know the size of these expenses, you can apply for a personal loan in the right amount. With a personal line of credit, you can take money out of the line of credit as needed and do so multiple times if you find you need to draw more than once.

For example, a personal loan can come in handy if you have an unexpected bill to pay. A personal line of credit may be more appropriate for someone working on a home improvement project who isn’t sure how much it will cost.

Common uses for personal loans

Personal loans can be used for many different reasons.

One of the most common reasons is debt consolidation. If you have multiple credit card balances and other small loans, you can use one personal loan to pay off these balances. This allows you to make one monthly payment and can reduce the amount of interest you pay.

Home renovations and vehicle repairs are also common uses for personal loans.

You can also use a personal loan for unexpected expenses. Because they have lower interest rates and credit cards tend to, using a personal loan this way can help you save money.

Many people use personal loans for weddings, vacations and similar expenses. Be careful: you will be repaying the loan long after the party or trip is over!

🚨 More information: Learn how to protect yourself from personal loan fraud by spotting the warning signs in our latest guide.

Bottom Line

Personal loans are highly flexible loans that you can use for different purposes. There are many types of personal loans, but they all offer money that can be used for a variety of personal needs.

If you need money for something, applying for a personal loan can be one way to get that money. Just keep in mind that you will repay the loan with interest. It is best to use these loans for necessities, not for luxuries and avoid borrowing if your credit is not up to par!

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