The most common type of personal loan is an unsecured fixed-rate loan. But you can also find loans that accept collateral, allow cosigners and offer rates that change over time. Which choice is best for you depends on your unique situation and how you plan to use the funds.
An unsecured loan is the most common type of personal loan. It works by giving you all of the funds at once, which you repay plus interest and fees over a period of time — usually three to seven years.
What makes a personal loan unsecured is the fact that it doesn’t require collateral. This can speed up the application process, and you don’t risk losing your assets if you can’t pay it off. But it can be harder to qualify for a competitive rate unless you have strong credit and a low debt-to-income ratio.
Risk losing your collateral, potentially longer application
A secured personal loan works just like an unsecured loan, only you have to back it with collateral. If you can’t pay off the loan and go into default, the lender takes the collateral to recover its losses.
Common types of collateral include savings accounts and CDs, as well as personal possessions like a car or valuable jewelry. Because lenders consider secured loans less risky, they often come with lower interest rates than unsecured loans.
Help meeting requirements on an unsecured loan for a better deal
Fewer lenders offer this option, risk damaging relationship with cosigner
A cosigned personal loan is usually an unsecured loan you apply for with another applicant, which you’re both equally responsible for repaying. Your lender often only considers the highest credit score and income between the two of you.
This makes it a viable choice if you have poor credit, little credit history or depend on your spouse’s income. It’s different from a coapplicant loan, where your lender consider both applications equally.
Potentially pay more than a variable-rate loan if interest rates decrease
Most personal loans come with fixed interest rates, which stay the same while you repay the loan. This means you pay the same amount each month and can predict your total loan cost ahead of time. But you might end up paying more in interest than if you went with a variable-rate loan — especially if you have a long loan term.
Potentially pay less interest than a fixed-rate loan
Less predictable repayments with the risk of paying higher rates
Some personal loans come with variable rates, which can increase or decrease depending on changes in the economy — usually every three months. Variable rates can often go lower than fixed rates, but also come with the risk of being much higher. Since rates can change, it can be more difficult to plan ahead for repayments and predict your total loan cost.
Access to cash for ongoing projects like home improvements
Not ideal for a one-time expense
A personal line of credit gives you access to funds that you can draw from as needed. It’s similar to a credit card, but gives you access to cash and typically comes with lower rates. Each time you make a draw, you might either repay it in monthly installments plus interest and fees or have a minimum monthly repayment. Credit lines can be secured or unsecured with fixed or variable rates.
Fewer options than your standard unsecured personal loan
You can use any personal loan to pay off credit card balances and other debts to save on interest and have more manageable repayments. But some lenders offer personal loans designed specifically for debt consolidation. With these loans, the lender pays off your creditors for you, simplifying the process. While it might be easier, you have fewer options to compare and might not find as competitive a deal.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
4 questions to help you choose the right type of loan
Still not sure which loan is right for you? Ask yourself the following questions:
If you have one fixed expense, most of these options are available to you. But if you want to fund an ongoing project or think you might need to borrow again in the near future, a line of credit might be the way to go.
And those who want a loan to manage credit card debt might want to consider both debt consolidation and unsecured personal loans.
Most lenders require a credit score of 670 or higher and a debt-to-income ratio below 45% to qualify for a loan on your own.
If you can’t meet these requirements, consider a secured loan or applying with a cosigner.
If you don’t mind the risk of paying a little more in interest, you might want to consider a variable-rate loan — especially if you’re taking out a loan with a longer term. Otherwise, go with a fixed rate.
Trying to stick to a budget? A fixed rate might be the way to go. It’s easier to plan around, and you don’t risk going way over budget on loan repayments. Otherwise, a variable rate might be worth considering.
5 other types of loans
Looking to pay for a specific expense? Don’t have the best credit? Here are other types of loans to check out instead:
Student loans. Fund an undergraduate degree, certificate program, graduate degree and more with federal and private loans designed for students.
Car loans. Buy a car with a loan that uses your vehicle as collateral, either from a dealership or private seller.
Short-term loans. Small-dollar loans with high APRs and terms usually no longer than 18 months for all credit types.
Title loans. Fast, high-interest financing for all credit types backed by your lien-free car title.
Business loans. Financing designed to fit the needs of small businesses and startups, from working capital to buying equipment.
Bottom line
Getting the right type of loan can help maximize your savings, keep you from overborrowing or help you qualify if you can’t on your own.
While it depends on your credit, income and whether you have collateral, secured and cosigned loans are usually the easiest to qualify for. Unsecured loans are often the most difficult to get approved for.
Unsecured personal loans are usually faster than secured or cosigned options. That’s because the application is shorter and the lender doesn’t have to review collateral.
A bank loan typically has lower rates than an online loan, but can be more difficult to qualify for and often has a longer application. Online loans typically only take a few minutes to apply for, and you could receive your funds as soon as the next business day. Compare the different providers that offer personal loans to find the right one for your needs.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 1,000 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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