6 Types of Personal Loans and How to Choose

Whether you’re looking to purchase a car, make home repairs, or need a buffer until your next payday, a personal loan can be a helpful tool. While most personal loans are installment loans — you pay them back in fixed monthly payments — they can have many names and may have different features.

Before applying, it’s helpful to understand the different types of personal loans in order to find the best fit for your needs.

Unsecured personal loans

Unsecured personal loans do not require that you put up collateral to borrow money — most personal loans are unsecured loans, whether they’re used for home repairs, medical bills, or debt consolidation. Since no collateral (like your car or home) is required to get an unsecured loan, approval can be swift and you could get money the same day you apply for it.

Like any loan, you’ll need to go through an approval process — to get an unsecured personal loan, lenders typically consider your credit history, income, and existing debt. If approved, you receive the loan funds in one lump sum. Loan amounts are available up to $100,000 or more, depending on your ability to repay and the lender; repayment terms typically last between one and seven years, but may be longer for large loan amounts.

Loans you take out may be fixed-rate (doesn’t change throughout the life of the loan) or variable-rate loans (changes periodically based on factors like the overall economy). In most cases, interest rates are higher than on secured loans because lenders perceive these types of loans to be riskier.

Secured personal loans

Like unsecured loans, secured loans are typically fixed-rate installment loans. However, unlike unsecured loans, secured loans are backed by collateral. Lenders have a right to seize your collateral if you fail to pay back your loan. Items you can secure a personal loan with include your car, a savings account, or even the fixtures in your home. Since there is a physical asset lenders can use to recoup their losses, you can usually get a lower interest rate on a secured loan relative to one that’s unsecured.

To apply for a secured personal loan, the lender will need to verify the value of your collateral, in addition to checking your credit, income, and current debt. For this reason, secured loans may take longer to get approved.

Keep in mind that some, but not all, lenders offer secured personal loans — OneMain Financial, Best Egg, and Upgrade are a few Credible partners that do. As a result, available loan amounts may be somewhat lower, relative to unsecured loans (up to $50,000 with the aforementioned lenders). Repayment terms typically last between one and seven years.

Learn More: What Is the Different Between Interest Rate and APR?

Debt consolidation loans

Debt consolidation loans describe any loan that you use to pay off existing debt. That way, you only end up with one monthly payment and, ideally, a lower net interest rate. Personal loans, home equity loans, and credit card balance transfers are some options for debt consolidation. Balance transfers and most personal loans for debt consolidation are unsecured. But if you use a home equity loan to pay off debt, that loan would be secured by the equity in your home.

Many borrowers take out debt consolidation loans to simplify their monthly debt payments or to lower their payments. Payments may be lowered by extending your loan term, qualifying for a lower interest rate, or both.

Cosigned and joint loans

Both of these types of personal loans are where another person signs the loan documents with you. The main difference lies in who has a right to the proceeds:

• Cosigned loans: A cosigner is someone who agrees to use their credit profile to help you improve your chances of getting a loan. The cosigner promises that if you are unable to repay the loan, the lender can seek payment from the cosigner. The cosigner does not have a right to use the loan funds. But any late payments you make could reflect poorly on the cosigner’s credit, since the account will become part of their credit report.
• Joint loans: Both borrowers’ credit profiles are considered during the application process, and each co-borrower has equal right to the loan money and is equally responsible for repayment.

Joint loans are typically a good fit for spouses or those in domestic partnerships where they want to take out a loan to own a joint asset like a house. A cosigned loan is a great choice for someone who wants a loan but whose credit profile isn’t strong enough to qualify.

Realtaed: Co-applicant vs. Cosigner

BNPL loans

“Buy now, pay later,” or BNPL, loans are a type of short-term installment loan you can use to make purchases. For example, many online retailers allow you to use BNPL to purchase electronics, clothing, furniture, etc. They typically run a soft credit check to see if you qualify — this means it won’t impact your credit, but bad-credit borrowers may struggle to get approved for BNPL financing.

Depending on the company, BNPL plans may split up repayment into four biweekly payments with no interest charges. You may have to pay the first installment when you make the purchase.

Buy now, pay later loans may be a good fit if you can confidently pay off purchases over a six-week time frame. However, many BNPL lenders provide options to extend payments for up to a year or longer — but these options typically carry APRs up to 36%.

Bad-credit loans

Aside from secured loans or using a cosigner, there are personal loans available for those with bad credit, including:

• Payday alternative loans (PALs): PALs are small loans for credit union members up to $2,000. They’re designed for borrowers who might struggle to get approved for a regular personal loan. APRs are capped at 28%, and repayment terms range up to 12 months.
• Payday loans: These are very short-term, high-fee loans, usually available up to $500 with no credit check. The amount you borrow is typically due when you receive your next paycheck. In some states, payday loan APRs can be over 500%, which can make repayment challenging and lead to a destructive cycle of expensive debt.
• Pawn shop loans: Some pawn shops make loans if you offer personal property as collateral, like jewelry, tools, or a musical instrument. The item is stored at the shop until the borrower has repaid the loan or when the pawn contract has expired without repayment. In that case, the pawn shop has the right to sell the personal property. Pawnshop contracts may expire in as little as one month — if you’re not sure you can pay the loan back, don’t secure it with something you can’t afford to lose.
• Cash advance apps: Like payday loans, cash advance apps usually require repayment by your next paycheck. There’s no credit check, and loan amounts are generally limited to $500 or $1,000, depending on the app and your income. With some apps, like Earnin and MoneyLion, fees are optional — like for tipping or expedited payments. But these fees can add up to triple-digit APRs.
• No-credit-check personal loans: Some personal loan lenders offer loans with only a soft credit inquiry or no credit check during the application process. It’s crucial to shop these loans, as APRs could be around 150%, which is lower than many payday loan APRs, but still considered predatory. Repayment terms may last from less than a year to 5 years, depending on the lender. 60 Month Loans may be one to consider, as APRs typically top out around 36%.

Choosing the right personal loan

Choosing the right personal loan depends on your financial situation and goals. For instance, if you want to borrow money in order to upgrade your home, an unsecured personal loan may be a good choice, as large loan amounts are available, and approval can be quick (if you have good credit). On the other hand, if you only need a small amount to make purchases for the holiday season, a BNPL loan may be a better choice.

Before applying for a loan, take the time to compare different lenders, including APRs, loan terms, and fees. The APR accounts for both the loan’s interest rate and upfront fees, and is the great equalizer when it comes to comparing loans that charge fees instead of interest (this is common with no-credit-check loans like payday loans and cash advance apps).