What Are the Different Types of Personal Loans?

What Are the Different Types of Personal Loans? article image.

If you're looking for a personal loan, you'll find that there are quite a few types available. Some may have additional requirements, higher fees or be easier to qualify for than others. Understanding all your options—and knowing when a certain type of financing might be better—can help you make the right choice when it's time to borrow money.

What Is a Personal Loan?

A personal loan is an installment loan that's given to a borrower without a requirement to use the money for a specific purchase. In contrast, when you take out a loan such as an auto loan, student loan or mortgage, you're restricted to using the money for those express purposes.

Some lenders let you check your personal loan offers online without any impact to your credit scores. When you apply, you may need to share your personal and financial information and agree to a hard credit pull, which can have a small, temporary negative effect on your credit scores. If you qualify, you may be able to choose between several offers with varying repayment periods, interest rates and monthly payments.

Personal loans generally have fixed interest rates, and monthly payments that stay the same for the life of the loan. Some lenders charge an upfront origination or administration fee that you won't get back. You can also generally repay the loan early without being charged additional fees or penalties.

Types of Personal Loans

There are several types of personal loans, and the option that's best for you depends on your unique needs and creditworthiness.

Unsecured Personal Loans

Many personal loans are unsecured loans, meaning you don't have to offer collateral the lender can take possession of if you default on the loan. Unsecured loans may be less risky for borrowers because you won't lose any possessions if you can't afford a payment, but they may have higher fees, interest rates and credit requirements than secured loans.

Lenders that offer unsecured personal loans may specialize in lending to borrowers with good credit—SoFi, for example. Others, such as Avant, are open to borrowers with fair credit or better.

Secured Personal Loans

Secured personal loans aren't as common as unsecured personal loans. Generally, you'll secure the loan with money that's locked in a savings account, certificate of deposit or money market account. You may find them at credit unions and banks, or a lender such as OneMain Financial. A credit-builder loan is a type of secured personal loan that's offered specifically to help people build credit.

Personal Loans From Lending Platforms

Some online services, such as Prosper and Upstart, are marketplaces or platforms that connect borrowers with lenders. The application and repayment experience might not be hugely different for borrowers, although it could take a little longer to receive the funds once your application is approved versus a more traditional loan.

Personal Loans for Specific Purposes

Many lenders advertise their personal loans with a specific use in mind. For example, you might find a lender that has different pages on its website for wedding, funeral and emergency loans. While the loan offers target people who want to take out a loan for that purpose, the loans themselves are often simply personal loans. If you get one of these loans, you won't necessarily be required to use all (or even any) of the money for the stated purpose.

Debt Consolidation Loans

One common type of targeted personal loan—and a common reason people take out personal loans—is a consolidation loan to consolidate debts that have higher interest rates. For example, Payoff offers personal loans that can be used to pay off credit card balances. By moving the debt to a lower-rate personal loan with a fixed repayment term, borrowers can save money while also having a more structured repayment plan. Some lenders, such as Upgrade, can send your loan directly to your credit card issuers or other lenders.

Types of Personal Loans to Avoid

Some personal loans are generally last-resort options that you should try to avoid.

  • Payday loans: Payday loans are short-term loans with very high fees. These may leave borrowers in a debt cycle where they wind up taking out new loans to pay off their current debts.
  • Title loans: Auto title loans can be easy to get, but you need to use your vehicle as collateral. They may have short repayment terms and high interest rates that could leave you worse off if you can't afford a payment and the lender repossesses your vehicle.
  • Pawn shop loans: Some pawn loans may be cheaper than payday loans. However, you risk losing the items you pawn or may have to pay a fee to extend the repayment term.

While your options may be limited if you have bad credit, these personal loans may have high fees or interest rates and short repayment terms that make them difficult to repay. Missing payments or defaulting on loans will only worsen your credit situation.

When to Use a Credit Card Instead

While personal loans can be a good fit for many situations, sometimes using a credit card makes more sense.

For example, while credit cards often have high interest rates, paying the interest on a several hundred dollar credit card balance over a few weeks is a more reasonable option than a payday loan. A $300 payday loan with a two-week payment period might cost you $45. A $300 credit card balance with a 28% annual percentage rate (APR) costs about $3 in interest over the same period. You can avoid interest charges on a credit card balance, however, by paying off your balance before the end of the card's grace period.

If you have good credit, you may also be able to qualify for a credit card with a promotional 0% intro APR offer.

The standard rate that applies to the balance that remains after the promotional period ends may be higher than what you could get with a personal loan, but you won't have to pay any origination fees. And any balance you pay off before the end of the promotional period won't accrue interest.

How to Get a Personal Loan

You can find personal loans from a variety of financial institutions, including banks, credit unions and online lenders. In general, you should look for the loan that has the lowest fees and interest rates (in other words, the lowest APR).

You can use a personal loan calculator to estimate your payments based on how much you want to borrow. However, you won't know the exact APR of your offers until after you apply.

Getting prequalified with several lenders could help you narrow in on which one could offer you the most favorable terms. (It won't necessarily be the lender that has the lowest advertised rates.)

Once you check your offers and are ready to apply, many lenders have a straightforward online application process. Lenders may also ask for verification documents, such as copies of recent pay stubs. After approving your application and verifying your information, many lenders can directly deposit the loan into your bank account. It may take several days for the transfer to be completed.

Find and Compare Your Personal Loan Offers

Using Experian's CreditMatch™, you can compare personal loan offers from Experian's partners. You can also create an account and submit a prequalification application. Experian will then gather prequalified loan offers from partner lenders. You have up to 30 days to compare the offers and choose the one that works best for you.

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To submit a dispute online visit Experian's Dispute Center. If you have a current copy of your personal credit report, simply enter the report number where indicated, and follow the instructions provided. If you do not have a current personal report, Experian will provide a free copy when you submit the information requested. Additionally, you may obtain a free copy of your report once a week through April 2022 at AnnualCreditReport.