Types of personal loans and how to choose

Personal loans are a flexible form of financing that can be used to cover nearly any type of expense. Whether it’s home renovations, a major purchase, medical bills or debt consolidation, a personal loan can be a useful financial tool. 

When taking out a personal loan, you receive a lump sum up front that’s paid back in installments over time. While many personal loans are unsecured and come with fixed interest rates, there’s a variety of other personal loan types that you may come across as well, including secured personal loans, joint loans and variable-rate loans. 

Types of personal loans

Personal loans come in many forms including unsecured loans, secured loans, debt consolidation loans and more. Each type of loan has its own benefits and drawbacks, making it important to review the options before making a decision. 

Unsecured personal loans

The majority of personal loans are unsecured, meaning they don’t require you to back them with collateral. This structure is different from an auto loan, for example, which is a secured loan backed by your car. 

Since lenders don’t ask you to back your loan with collateral, they instead rely heavily on your credit and income when making a lending decision. The stronger your credit, the more likely you’ll be to qualify for a competitive interest rate. 

Interest rates on unsecured personal loans often range from 6% to 36%, and loan terms may span anywhere from one to seven years. Some lenders let you borrow as little as $1,000 and as much as $100,000 or more, though borrowing limits will vary by lender. 

Secured personal loans

Some lenders offer secured personal loans, which are backed by collateral. Secured personal loans may come with more competitive rates and in higher amounts than unsecured ones. Plus, the credit requirements might be less stringent for borrowers. The risk of a secured loan, however, is that you could lose your asset if you fall behind on payments. 

“Secured personal loans do carry the risk of attaching an asset as collateral, so the failure to repay would result in having that asset potentially seized,” says Daniel Cieniewicz, certified financial planner at Hyperion Financial, LLC. “But for borrowers who may not have the creditworthiness or who are looking for the best interest rate, attaching collateral can make sense.”

Debt consolidation loans

Debt consolidation is another common type of personal loan. If you can qualify for a personal loan with a better interest rate than you have currently on your debts, you could save money on your balance. Plus, you can choose new repayment terms with a monthly payment that works better for your budget. 

Debt consolidation loans are typically unsecured personal loans with fixed interest rates. In some cases, a lender may send the loan proceeds to your creditors directly, saving you that step of paying off your balances. Then, you’ll pay back your new debt consolidation loan with a single monthly payment. 

Co-signed and joint loans

If you don’t have strong enough credit to qualify for a personal loan on your own — or are married and want to share the debt with your spouse — you may choose to apply with a co-signer or co-borrower. 

Both co-signers and co-borrowers will have the loan show up on their credit report. The main difference is that the co-borrower shares the loan and may help repay it from the start, whereas a co-signer may only be obligated to pay back the loan if the primary borrower misses payments. 

“A co-signer is considered more of a ‘backup,’ [whereas] a co-borrower is actively taking part in the loan,” says Cieniewicz. 

Either way, adding a creditworthy co-signer or co-borrower to your loan can help you meet a lender’s credit requirements and potentially access better rates. Not all lenders allow co-signers or co-borrowers, though, so you’ll need to find one who does if you wish to take this approach. 

Fixed-rate personal loans

Most personal loans come with fixed interest rates, which stay constant over the life of the loan. The benefit of a fixed interest rate is that you’ll know exactly what your payment will be each month. 

Plus, you can estimate your long-term costs upfront with a personal loan calculator. If, for example, you borrow a $15,000 loan with a fixed rate of 10% and a three-year repayment term, your monthly payments would be $484 and total interest charges would be $2,424.

The potential downside of a fixed-rate loan is that you won’t reap any savings if market rates drop — your rates will stay the same from the time you borrow until the loan is paid in full. 

Variable-rate personal loans

Although less common, variable-rate personal loans may also be an option. A variable interest rate fluctuates with market conditions, often on a monthly or quarterly basis. 

A variable rate may start out lower than a fixed rate, so it could potentially save you money if you pay off your loan quickly. However, it could increase if rates go up, leading to higher costs of borrowing. Plus, it’s impossible to determine exactly what your long-term loan costs will be since you can’t predict what will happen to your rate in the future. 

Buy now, pay later loans

Buy now, pay later (BNPL) loans are a form of short-term financing that you may be able to use for large purchases. Also called point-of-sale installment loans, BNPL loans let you spread out the cost of a large purchase over time. 

This option is often available when shopping online or through an app, but may also be available at checkout in a store. A BNPL may or may not come with interest charges and fees. For instance, you may qualify for 0% interest if you pay off the amount in a month or two. If you want a longer term, the BNPL loan may charge interest and fees. 

BNPL loans can be helpful to finance large purchases, but be careful not to overextend your finances and spend more than you can afford to pay back within the designated time frame. 

Which type of personal loan is right for you?

With the various types of personal loans available, it’s natural to wonder which option is right for you. Here are some ways to determine your best match: 

• Consider your financial needs. Identify how much you need to borrow to make sure you don’t take on more debt than you need. It’s also worth reviewing alternative financing options, such as a 0% APR credit card or home equity loan, to make sure a personal loan is the appropriate financing option. 
• Review your credit score. Use a free credit monitoring service or purchase your FICO scores so you know what a lender will see when it reviews your application. A score of 670 or higher should help you qualify for an unsecured loan, though requirements will vary by lender. If you have a lower score, you could either take steps to improve it before you apply or consider a secured or co-signed personal loan. 
• Shop around with lenders. Each lender has its own requirements, rates and terms, so be sure to check out offers from banks, credit unions and online lenders to see which could make you the best loan offer. You might also read over customer reviews on a site like TrustPilot to see what other borrowers have to say and make sure the lender is reputable. 
• Compare interest rates, fees and repayment terms. Some personal loan providers let you pre-qualify for loans online, meaning you can check your rates without harming your credit score. As you review offers, look for a loan with a competitive interest rate, low (or no) fees and repayment terms that work for your budget. 

Keep in mind: Ultimately, the best type of personal loan is one with an affordable monthly payment and low long-term costs (like a low rate and minimal fees).