Most personal loans are unsecured with fixed payments. But there are other types of personal loans, including secured and variable-rate loans. The type of loan that works best for you depends on factors including your credit score and how much time you need to repay the loan.
Unsecured personal loans
This common type of personal loan isn’t backed by collateral, such as your home or car, making them riskier for lenders, which may charge a slightly higher annual percentage rate, or APR. The APR is your total cost of borrowing and includes the interest rate and any fees.
Approval and the APR you receive on an unsecured personal loan are mainly based on your credit score. Rates typically range from 5% to 36%, and repayment terms range from one to seven years.
Secured personal loans
These loans are backed by collateral, which can be seized by the lender if you default on the loan. Examples of other secured loans include mortgages (secured by your house) and car loans (secured by your car title).
Some banks, credit unions and online lenders offer secured personal loans, where you can borrow against your car, personal savings or another asset. Rates are typically lower than unsecured loans, as these loans are considered less risky for lenders.
Most personal loans carry fixed rates, which means your rate and monthly payments (sometimes called installments) stay the same for the life of the loan.
Fixed-rate loans make sense if you want consistent payments each month and if you’re concerned about rising rates on long-term loans. Having a fixed rate makes it easier to budget, as you don’t have to worry about your payments changing.
Interest rates on variable-rate loans are tied to a benchmark rate set by banks. Depending on how the benchmark rate fluctuates, the rate on your loan — as well as your monthly payments and total interest costs — can rise or fall with these loans.
One benefit is variable-rate loans typically carry lower APRs than fixed-rate loans. They may also carry a cap that limits how much your rate can change over a specific period and over the life of the loan.
A variable-rate loan can make sense if your loan carries a short repayment term, as rates may rise but are unlikely to surge in the short-term.
Debt consolidation loans
This type of personal loan rolls multiple debts into a single new loan. The loan should carry a lower APR than the rates on your existing debts to save on interest. Consolidating also simplifies your debt payments by combining all debts into one fixed, monthly payment.
This loan is for borrowers with thin or no credit histories who may not qualify for a loan on their own. A co-signer promises to repay the loan if the borrower doesn’t, and acts as a form of insurance for the lender.
Adding a co-signer who has strong credit can improve your chances of qualifying and may get you a lower rate and more favorable terms on a loan.
Personal line of credit
A personal line of credit is revolving credit, more similar to a credit card than a personal loan. Rather than getting a lump sum of cash, you get access to a credit line from which you can borrow on an as-needed basis. You pay interest only on what you borrow.
A personal line of credit works best when you need to borrow for ongoing expenses or emergencies, rather than a one-time expense.
Other types of loans
A payday loan is a type of unsecured loan, but it is typically repaid on the borrower’s next payday, rather than in installments over a period of time. Loan amounts tend to be a few hundred dollars or less.
Payday loans are short-term, high-interest — and risky — loans. Most borrowers wind up taking out additional loans when they can’t repay the first, trapping them in a debt cycle. That means interest charges mount quickly, and loans with APRs in the triple digits are not uncommon.
Credit card cash advance
You can use your credit card to get a short-term cash loan from a bank or an ATM. It’s a convenient, but expensive way to get cash.
Interest rates tend to be higher than those for purchases, plus you’ll pay cash advance fees, which are often either a dollar amount (around $5 to $10), or as much as 5% of the amount borrowed.
This is a secured personal loan. You borrow against an asset, such as jewelry or electronics, which you leave with the pawnshop. If you don’t repay the loan, the pawnshop can sell your asset.
Rates for pawnshop loans are very high and can run to over 200% APR. But they’re likely lower than rates on payday loans, and you avoid damaging your credit or being pursued by debt collectors if you don’t repay the loan; you just lose your property.