There are many different types of personal loans out there, and some will be a much wiser pick than others. The different combinations of costs, repayment terms, and loan structure can make your loan a financially smart or harmful choice.
Of course, the personal loan types that are best for you will depend on your own circumstances. With this list of 10 common types of personal loans, you can compare choices and see when each makes sense.
Secured vs. unsecured personal loan
Whether a personal loan is secured or unsecured refers to whether there is collateral tied to the loan. With collateral, the borrower attaches an asset they own to a loan to guarantee its repayment. If they should fail to make payments, the lender has the right to take ownership of the collateral.
A common form of a secured personal loan, for example, is a title loan. For title loans, the title of the borrower’s car serves as collateral. If they should fail to repay, the lender may repossess the car.
The collateral that guarantees a secured personal loan lowers the risk to a lender that a borrower will default. Because of this lower risk, secured personal loans often have less-strict credit requirements. A secured loan will also typically carry lower rates than a similar unsecured personal loan.
An unsecured loan, on the other hand, has no collateral attached to the loan. This makes it a riskier option for the lender. This risk is often offset by stricter lending guidelines and higher interest rates.
How to choose:
If you have less-than-ideal credit, you’ll probably have an easier time qualifying for a secured personal loan. These types of personal loans can also be a smart choice if saving on interest is a top priority, since secured loans tend to carry lower rates.
On the other hand, an unsecured personal loan doesn’t require that you have an asset to use as collateral. It also won’t put any existing assets at risk of repossession, should you default on the loan.
Variable-rate vs. fixed-rate personal loan
Every personal loan has an interest rate that indicates how much the borrower will have to pay in exchange for borrowing money. There are two main personal loan types when it comes to interest: fixed or variable.
A fixed-rate personal loan has an interest rate that remains the same throughout the life of the loan. The lender does not have the right to raise the interest rate. This means the borrower will always know what they will be paying and monthly payments will never go up.
With a variable-rate personal loan, however, the interest rate can change over time to match the overall credit market. If interest rates go up for banks and lenders, then a personal loan’s variable rate will also be adjusted up.
If a variable interest rate goes up, this also raises the monthly payments on the loan and the total interest the borrower will pay. However, variable-rate personal loans often have initial rates below what is offered on a fixed-rate loan.
How to choose:
If you want steady payments that don’t change, a fixed-rate personal loan is the way to go. This option can also protect borrowers against interest fluctuations. This can be especially beneficial for longer repayment periods.
A variable interest rate, however, can save you money in the short-term. It might be a better option for a small loan or a loan you plan to pay off early.
Installment vs. single-payment personal loan
With an installment personal loan, a borrower receives the money in one lump sum and then repays it in regular (usually monthly) smaller payments. A borrower will also likely pay less interest, as each payment will reduce the principal and lower the amount upon which interest is charged.
A single-payment personal loan, on the other hand, requires the borrower to repay the loan plus interest in a lump sum at a set date, when the loan matures. These types of loans are also sometimes called single-payment notes.
Single-payment loans are not offered as widely as installment loans, so finding a lender offering these types of personal loans could be tricky.
How to choose:
A single-payment personal loan is usually only a good idea if you’re confident you can repay the full loan plus interest at maturation. It can be used to borrow if you know you’ll be getting a large payment at some point, such as a year-end bonus or inheritance, but need cash now.
Installment loans, on the other hand, are more widely available and tend to be much easier to keep up with. Early or extra payments are also typically accepted on a personal loan. If you want greater flexibility to repay your loan, a personal loan is likely the better choice.
Traditional vs. peer-to-peer personal loan
A recent development in the world of personal loans is peer-to-peer lending. With traditional personal loans, a bank or conventional lender funds the loan and a borrower repays that institution.
With peer-to-peer lending, loans are financed by real people instead of financial institutions. Individual lenders might be able to take on a little more risk, so credit requirements for peer-to-peer loans are usually more flexible.
Online companies like Lending Club and Prosper facilitate the loans between individual lenders and borrowers, usually charging a percentage-based fee to do so. This origination fee can be as much as 5% of the loan amount, which can add a substantial cost to a loan.
How to choose:
A peer-to-peer loan might be a favorable option for a borrower who would have trouble qualifying for a traditional loan. You’ll probably need decent credit, but it can be a more flexible option than a secured loan.
A good reason to choose a traditional lender, however, is to avoid the origination fee charged on peer-to-peer loans. While peer-to-peer lending has this costly fee, it will be much easier to find personal loans without it.
Payday vs. long-term personal loan
The last types of personal loans are long-term loans and payday loans.
Typically, a long-term loan is just a traditional personal loan that has a repayment period of 60 months or more.
This longer repayment period comes with lower monthly payments, but a longer repayment period usually results in higher interest rates and increases total costs over the life of the loan. Borrowers will also be stuck with this debt for a longer time.
A payday loan, sometimes called a cash advance, has a repayment term of less than a month — typically 14 days, according to Debt.org. These kinds of loans also carry exorbitant interest rates, sometimes as much as 200% or even 500%. Because of that, these loans are rarely advisable. Read more about the risks here.
How to decide:
Payday loans are almost never a smart choice, since the high-interest rates and short repayment periods can quickly trap consumers in a debt cycle. Borrowers considering a payday loan might instead try peer-to-peer lenders or online lenders, which might offer fast funding and shorter repayment periods.
Long-term personal loans will have much more favorable terms. With lower monthly payments, this type of loan can affordably finance expensive purchases.
Whether you’re looking to consolidate debt or cover an emergency expense, a personal loan can help do that. However, these debts shouldn’t be taken lightly. Research different types of personal loans and compare your options.
Choosing a cost-conscious and affordable personal loan will help you get the credit you need without hurting your future finances.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|