Our writers and editors used an in-house natural language generation platform to assist with portions of this article, allowing them to focus on adding information that is uniquely helpful. The article was reviewed, fact-checked and edited by our editorial staff prior to publication.

Key takeaways

  • Personal loans come in many forms, including secured and unsecured loans, debt consolidation loans and personal lines of credit.
  • Unsecured personal loans are common among lenders and don't require collateral.
  • Secured personal loans are less common as they require collateral and usually offer lower interest rates.
  • You can use personal loans for a variety of purposes, such as consolidating debt, paying off medical debt or financing a home improvement project.

Personal loans are available through banks, credit unions or online lenders. They can be used for a wide range of purposes, come in two forms — secured and unsecured — and are typically paid off over a term of one to seven years.

You’re not alone if you’re considering a personal loan to get over a financial setback or consolidate debt. According to a recent Experian study, the average consumer carried personal loan debt of around $19,402. However, not every loan is created equal and there are some that function better than others depending on your credit and financial situation.

Types of personal loans

Personal loans are a highly flexible product, with rates, terms and types for people with many different credit profiles. Know your credit score before applying. This will help you decide whether you should get an unsecured or secured personal loan and whether to consider a joint or co-signed loan.

You should also have a clear picture of your financing needs before you apply and have a clear financial goal. Doing so will narrow down the type of loan that is best for you even further.

Unsecured personal loans

An unsecured personal loan doesn’t require collateral to get approved. Whether you qualify is based solely on your credit score, income and in some cases your employment and education history. Because of this, you’ll typically need good or excellent credit to get approved for the best rates.

If you default on an unsecured personal loan, you won’t risk losing an asset. You will, however, damage your credit. Keeping up on payments and managing your loan well are important regardless of whether it is unsecured.

Who it's best for:
Those with excellent credit and a low debt-to-income (DTI) ratio.


Secured personal loans

Secured personal loans require collateral in order to get approved. Two types of secured loans you are likely familiar with already are auto and mortgage loans. Rather than being backed by a car or house, a secured personal loan might rely on something like a certificate of deposit (CD) or a savings account.

Because the loan is secured, the lender takes on less risk and may offer lower interest rates than you would get with an unsecured personal loan. The tradeoff is that if you default you risk losing the asset you put up as collateral. This is because the lender can legally seize it to offset what you owe.

Who it's best for:
Borrowers who have less-than-ideal credit and are certain they can repay the loan.

Debt consolidation loans

Debt consolidation loans are used to pay off outstanding debt balances faster and save on interest. Borrowers also get the benefit of streamlining the repayment process by combining multiple 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.

Who it's best for:
Those with multiple streams of high-interest debt.

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 creditworthy co-signer who has consistent income that can support the cost of the loan. Your co-signer must be willing to assume equal responsibility for the loan without being able to access the funds. If you default on the loan payments and they don’t cover it, their credit will take a hit along with yours.

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

Who it's best for:
Borrowers with a lower credit score who have a creditworthy co-signer on hand or those who want to share access to the loan funds.

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, with a portion of each monthly payment going toward the interest and principal.

The overwhelming majority of personal loans fit into this category. Because the payments don’t change over time, it is easy to budget accordingly when you take out a fixed-rate personal loan.

Who it's best for:
Good credit borrowers who prefer payment stability and qualify for a competitive interest rate.

Variable-rate loans

The interest rate on a variable-rate loan can fluctuate. However, you may be able to get a lower APR on a variable loan than you would with a fixed-rate loan.

The downside, of course, is that your variable rate could increase. It may also be more challenging to budget for variable-rate loan payments given they can fluctuate. You may want to take a shorter-term loan to pay it off faster and avoid the risk of the rate raising too much.

Who it's best for:
Individuals seeking an inexpensive, short-term loan.

Personal line of credit

A personal line of credit gives you access to a pool of funds that you can borrow from when you need to — similar to a credit card. You’ll only pay interest on the amount you borrow.

This may be a good option for people who want access to funds on an as needed basis but want a better rate than a credit card. Examples of situations that may benefit from a line of credit include a kitchen or bathroom renovation, overdraft protection or an ongoing emergency.

Personal lines of credit typically have variable rates and can be secured by a banking asset, but you may be able to find unsecured options with online lenders or smaller banks.

Who it's best for:
Those undertaking a longer, expensive purchase or project.

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, typically due in full within six weeks of the purchase date.

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

Who it's best for:
Borrowers who need immediate access to financing per purchase.

Types of loans to use sparingly

Some personal loans come with extraordinarily high interest rates 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 lenders charge a monthly fee to use their 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 and interest rates well over 300 percent. They can lead to a dangerous debt cycle if you can’t repay and end up having to 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.

Common uses for personal loans

Personal loans can be used for a wide range of expenses. Some common uses for personal loans include:

  • Debt consolidation: A personal loan can be used to pay off high-interest credit card debt through consolidating multiple payments into one consolidation loan.
  • Medical bills: Personal loans may be used to cover medical treatments that are not covered by insurance, or expensive co-pays that you wouldn’t otherwise be able to afford.
  • Funeral expenses: Whether it’s to travel to a funeral or arrange it, a personal loan may be able to help you cover necessary costs.
  • Car repair: The costs to repair a car are often expensive and unexpected. Using a personal loan could be a way to cover the cost of car repairs, especially if you need your car to get to work.
  • Relocation: Personal loans can cover most of the costs associated with moving, like hiring a moving company, rental deposits or furniture.
  • Home improvement or remodel: Personal loans can be used to finance home improvements, renovations or even large-scale remodels. This option is particularly popular among those who don’t have a significant amount of equity in their home or don’t want to dip into their existing equity.
  • Unexpected costs: Emergencies or unexpected costs can pop up at any time. If your emergency savings can’t cover the cost, you could use a personal loan.

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. Evaluate lenders carefully to ensure you select the ideal personal loan product for you.