Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.

Key takeaways

  • There are many types of personal loans, like 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, like consolidating debt, paying off medical debt or financing a home improvement project.

A personal loan is a debt product available through a bank, credit union or online lender. Personal loans can be secured or unsecured, are typically paid over a term of one to seven years and can be used for a range of purposes.

You’re not alone if you’re considering a personal loan to get over a financial setback or consolidate debt. According to TransUnion, as of Q2 2023 the average consumer carried personal loan debt of around $11,548. 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.

Unsecured personal loans

Unsecured personal loans are best for borrowers with good or excellent credit and don’t require collateral to get approved. However, they don’t come without risk; you’ll need to make the monthly payments on time or you could damage your credit.

Keep in mind that rates are generally higher with an unsecured loan since the lender assumes more risk by not requiring collateral.

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 property such as your car, boat or home. It’s also common for banks to require that a personal account — like a certificate of deposit (CD) or a savings account —  be used as collateral to secure a loan.

While secured loans may carry lower interest rates, if you fall behind on your loan payments, the lender could seize your asset to recoup what you owe.

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.

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

The interest rate on a variable-rate loan can fluctuate. However, you may be able to get a lower rate 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 be more challenging to budget for variable-rate loan payments given they can fluctuate. However, you may be able to get a lower rate on a variable loan than you would with a fixed-rate loan. The downside, of course, is that your variable rate could increase.

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.

A personal line of credit may be a good option for borrowers who want access to funds on an as-needed basis. For example, if you’re remodeling your entire kitchen, a line of credit can help you cover expenses as they arise. 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.

Holiday loans

Holiday loans are personal loans geared specifically toward financing holiday-related purchases and expenses. They function just the same as a traditional, unsecured personal installment loan, so technically, any personal loan can be used for these expenses.

However, some lenders may offer exclusive deals or benefits for holiday shoppers looking for a loan, so it may be in your best interest to read through the details and prequalify before applying for the first holiday loan you’re offered.

While not recommended as a first option, using a personal loan for a holiday is only a good idea if you need a smaller loan. You qualify for a low rate, and you’re certain you can make the payments on time and in full. Otherwise, you could end up paying more in interest accrual alone than you originally spent on the gifts and expenses in the first place.

“I worry about taking out a personal loan for a discretionary expense such as a vacation or a wedding, ” says Ted Rossman, Bankrate senior analyst. “It could take you several years to pay it off and this isn’t exactly low-cost debt.”

Rossman instead urges borrowers to use their savings or cash to pay for these larger expenses, especially in a high-rate environment. “While you’re paying off this vacation for the next five years, what about other future trip planning and other expenses?” he adds, stating that “the cumulative effect [of the debt] can be significant.”

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 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 and interest rates well over 300 percent. They can lead to 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.

What are common uses for a personal loan?

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 eligible for insurance reimbursement.
  • Funeral expenses: The average cost of a funeral was nearly $8,000 as of 2021.
  • Car repair: The costs to repair a car are often expensive and unexpected. Using a personal loan could be a useful way to cover the cost of car repairs, especially if you need the repairs done quickly.
  • Relocation: Personal loans can cover most of the costs associated with moving, like the cost of hiring a moving company, rental deposits, new furniture or the cost of a rental or moving vehicle.
  • 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.