Types of personal loans (2023)

The different types of personal loans

Before you can find the best personal loan, you'll want to understand the different loan types, how they work and their pros and cons. Here are the most common types of personal loans:

Unsecured loans

An unsecured personal loan is a loan that does not require collateral. This means that if you fail to repay the loan, you won’t have to surrender an asset, such as a car or savings in a bank account.

While the lack of collateral is a major advantage of unsecured personal loans, these loans may be more difficult to qualify for than secured loans that do require collateral.

To apply for an unsecured personal loan, you'll share certain information with the lender, like your employment situation and Social Security number. From there, you can be approved or denied for the loan based on your income, credit history and other factors.

Secured loans

With a secured personal loan, you have to put down some type of collateral, which can be seized if you don't make the loan payments. For example, auto title loans require you to provide the title of a vehicle as collateral. Collateral could also be cash you have in a savings account or certificate of deposit (CD).

While putting down collateral may not seem ideal, secured loans are often easier to get approved for since the lender can seize your asset if you fail to repay. This makes secured loans a good option for people who have imperfect credit but own an asset they can put down to help them qualify.

Fixed-rate loans

A fixed-rate loan has a set interest rate that does not change during the entire loan term. This also means the borrower knows exactly how much they'll pay each month and how long the loan term will last.

Fixed-rate loans are best for people who want the certainty of a locked-in interest rate and loan payment that won't change based on market conditions.

Variable-rate loans

Variable-rate loans have interest rates that fluctuate over time because they are tied to an index or benchmark interest rate. This means interest charges on variable-rate loans can go down when rates drop or increase dramatically in a high-interest environment. Some variable-rate loans have a rate cap, which is the maximum interest rate the borrower can be charged.

When a variable-rate loan’s interest rate goes up or down, the monthly payment on the loan fluctuates accordingly. This means variable-rate loans are good for borrowers when rates are dropping, but they can become expensive when rates are on the rise. As such, a variable-rate loan can be a good deal for a borrower who plans to pay off their loan early before its interest rate can go up.

» MORE: Interest rates and how they work

Co-signed and joint loans

Co-signed and joint loans involve multiple applicants. A joint loan has two co-borrowers, both of whom have access to the loan’s funds. A co-signed loan’s primary borrower has access to the loan’s funds; its co-signer does not have access to the loan’s funds, but their income and credit score may increase the primary borrower’s chances of approval for the loan.

Co-signed and joint loans are similar in many ways, and the terms are often used interchangeably. But there are slight differences between the two loan types and their typical use cases. Joint loans are typically best for couples who want to borrow together for a joint goal. Getting a co-signer makes sense when you want to be the primary borrower for a loan but don’t have the income or credit to qualify for the loan independently. For example, it’s common for a parent to co-sign on their child’s student loan.

With co-signed and joint personal loans, borrowers and co-signers alike are legally responsible for repayment. This also means that if loan payments are not made, the credit scores of both borrowers and co-signers will suffer.

» MORE: What affects your credit score?

Debt consolidation loans

A debt consolidation loan consolidates multiple debts into one. This type of personal loan lets you make a single payment each month at a (hopefully) lower interest rate than the rates that were charged for the previous debts.

A fixed-rate debt consolidation loan comes with a set repayment period that lets you know exactly when you can become debt-free. This makes debt consolidation loans a solid option for consumers who want to create a debt payoff plan they can stick to.

Alternatives to personal loans

If you need to borrow money but aren’t sure if a personal loan is right for you, there are other options to consider.

However, Howard Dvorkin, a certified public accountant and the chairman of consumer education site Debt.com, warns that all borrowing options have the same downsides. "None of them involve free money," he said. "You will need to pay back what you borrowed."

No matter what credit product you choose, avoid predatory lenders with exorbitant interest rates and be careful not to overborrow.

How to choose the right personal loan

To find the right personal loan for your needs, you'll want to shop around with a few different lenders. Consider the following factors before you apply:

• Loan fees: Some personal loans come with origination fees that can range from 1% to 10% of the loan amount. Watch out for other hidden fees as well, like application fees, late payment fees and prepayment penalties.
• Interest rates: Compare interest rates across several lenders to find the lowest rate you can qualify for.
• Loan amounts: The minimum loan amount offered by some lenders might be more money than you actually need. Conversely, a lender’s maximum loan amount may be lower than the sum you’re seeking.
• Repayment terms: Use a lender’s loan calculator to determine how different term lengths will impact your monthly payment. Remember that a longer repayment term can help you get a lower monthly payment, but it will result in more interest paid over the course of the loan term.

As you consider different personal loan companies, look for lenders that let you "check your rate" or gauge your approval odds before you apply. This lets you see what rates and loan terms you could potentially qualify for without a hard inquiry on your credit.

Bottom line

Carefully considering your financial situation, credit status and motivation for seeking funds will help you determine which type of loan may best serve your needs.

Once you’ve determined the type of loan you want, compare offers from multiple lenders before deciding on the right one for you.