A personal loan is a debt product available through a bank, credit union or online lender. They can be either secured or unsecured, are paid over a term of one to seven years and can be used for almost any expense.

You’re not alone if you’re considering a personal loan to get over a financial setback or consolidate debt. According to a Bankrate study, the average consumer carried personal loan debt of around $17,064 in 2021. Before you move forward with borrowing the funds you need, you should compare the types of loans that are available.

Types of personal loans

Personal loans come with a variety of terms and are a highly flexible product. When you decide to borrow a personal loan, know your needs and familiarize yourself with your options.

Secured personal loans

Secured personal loans require you to put up an asset as collateral. For example, many larger banks offer personal loans secured by a CD or savings account.

While a secured personal loan frequently results in lower interest rates, it comes with a major risk: If you fall behind on your loan payments, your lender could seize your asset and sell it to recoup what you owe.

Unsecured personal loans

Unlike secured personal loans, unsecured personal loans do not require collateral to get approved. Plus you’ll get fast access to funds without putting your assets at risk. They are best for borrowers with good or excellent credit.

However, you’ll generally pay more interest than with a secured personal loan since the lender assumes more risk.

Debt consolidation loans

Debt consolidation loans are commonly used to pay off outstanding debt balances faster to help save on interest. Borrowers also get the benefit of streamlining the repayment process by combining debts into a single monthly payment.

The idea is to borrow a loan with a lower interest rate than what you currently pay on the debts — credit card, medical and other bills — you plan to consolidate. You’ll use the loan proceeds to pay off those balances and make payments on a new loan product for a set period.

Ideally, you could save hundreds or even thousands of dollars in interest and get out of debt faster. But for it to work out, you’ll have to avoid putting more charges on the credit cards you free up.

Co-signed and joint loans

If you’re unable to qualify for a personal loan on your own, a lender might approve you with a co-signer. Your co-signer should have a strong credit history and be willing to assume responsibility for the remaining balance if you default on the loan payments. But your co-signer won’t have access to the loan funds.

Most lenders also offer joint loans. These allow both borrowers to access the loan funds. Like co-signed loans, both parties will be liable for loan payments. Your co-borrower will need good or excellent credit to strengthen your chances of getting approved for a loan.

Fixed-rate loans

Fixed-rate loans come with an interest rate that doesn’t change over the repayment term. You make the same monthly payment for the duration of the loan, and every month, a portion of the payment goes toward your interest and principal.

Most personal loans fit into this category. Working the loan payments into your spending plan is easier since it won’t change over time.

Variable-rate loans

Variable-rate loans have a fluctuating interest rate. As time passes, your monthly payment could go up or down if the benchmark rate established by banks changes. With rates on the rise recently, your monthly payments could rise, too.

While it’s challenging to budget for payments on variable-rate loans, rates are sometimes lower than what you’ll get with a fixed-rate loan. Ultimately, you should only consider a variable rate personal loan if you only need to borrow funds for a short period.

Personal line of credit

A personal line of credit operates like a credit card, so you will get access to a pool of funds that you can borrow from any time you need. Unlike personal loans, which require you to pay interest on the total loan amount, a personal line of credit only requires you to pay interest on the amount you draw.

This loan product is suitable for borrowers who want a safety net that can be tapped into on an as-needed basis. They typically have variable rates and are secured by a banking asset like a CD or savings account, but you may be able to find unsecured options with online lenders or smaller banks.

Buy now, pay later loans

Buy now, pay later loans allow consumers to make a purchase without paying the total purchase price upfront. Instead, the balance is divided and payable in equal installments, weekly or biweekly.

These loans are typically extended through mobile apps, like Afterpay, Klarna and Affirm. You could get approved for a buy now, pay later loan with less than perfect credit if you demonstrate your ability to repay the loan. Most lenders will review your bank activity and may conduct a soft credit check, which won’t impact your credit score.

Types of loans to use sparingly

Some personal loans could mean bad news for your finances and should only be used as a last resort. For borrowers with bad credit or those without access to a bank account, they may be one of a limited set of options.

If you can avoid them, you should. But if you can’t, be sure to keep on top of payments and try to pay off the loan as quickly as possible.

  • Credit card cash advances: Some credit card issuers allow you to take a cash advance from your available credit at an ATM or bank. But this perk comes at a hefty cost — you’ll likely be assessed a cash advance fee and a higher interest rate on the amount you borrow.
  • Cash advance apps: These apps also let you access fast cash, usually up to $250, until payday. Most charge a monthly fee to use this service, and you’ll have to repay what you borrow on your next payday or within a two-week period.
  • Payday loans: These loans are a costly form of debt that cater to borrowers with poor credit. Payday loans typically come with steep fees that are equivalent to interest rates well over 300 percent. They often create a dangerous debt cycle if you can’t repay and extend the loan term.
  • Pawnshop loans: If your local pawnshop offers loans, you can exchange your asset for cash. You’ll likely pay an exorbitant amount of interest, and the pawnshop will keep your property if you default on the loan.

How to choose the best type of personal loan for you

When evaluating lenders, consider these questions:

  • What rates and terms are offered?
  • How quickly can my loan be funded?
  • Are there origination or early repayment fees?
  • What terms does the lender offer?
  • Are there good customer reviews?
  • When are customer support representatives available?
  • Is there a mobile app?

A personal loan could be a good fit if you need a specific amount to cover a large, one-time expense. A line of credit — or even a credit card — may be ideal if you want the flexibility to borrow funds when you need them.

Pros and cons of getting a personal loan

A personal loan will last years, so carefully consider the benefits and drawbacks before you apply.


  • Flexible use: Most personal loans can be used however you see fit. Some lenders impose restrictions on how you can spend your funds, so it’s best to read the fine print to avoid issues.
  • Fast funding times: Many lenders disburse loan proceeds in just a few business days following approval. And it could be as soon as 24 hours if you apply with an online lender.
  • Borrowing costs: You’ll likely spend far less in interest on a personal loan than you would with a credit card. The average personal loan rate is 10.82 percent. A credit card has an average interest rate of 20.11 percent.


  • Fees: Some lenders charge origination fees and early repayment penalties. Although lenders are required to be upfront about these — and other — fees, they can add up and make your loan significantly more expensive.
  • High interest rates: If you have a lower credit score, expect a higher interest rate as the most competitive terms are generally reserved for borrowers with good or excellent credit. There are still some bad credit loans worth considering, but it may make more sense to improve your credit score first.
  • Negative credit consequences: Lenders report payment history to the credit bureaus. If you encounter financial hardship and are unable to make on-time payments, your credit score will likely take a hit if the loan reaches 30 or more days past due.

Bottom line

There are several types of personal loans to choose from, and each has its own benefits and drawbacks. Understand how personal loans work and what to expect before applying. And evaluate lenders carefully to ensure you select the ideal personal loan product for you.