If you’re looking for a personal loan, it’s a good idea to explore all different types of personal loans before picking one that’s right for you. Choosing the wrong type of loan could cost you more in interest, monthly payments, or total loan costs.
To help you decide, here are the pros and cons of all the different types of loans:
- Unsecured loans
- Secured loans
- Revolving credit
- Installment loans
- Fixed-rate loans
- Variable-rate loans
- Cosigned loans
- Payday loans
Most personal loans and small business loans are unsecured loans. Unsecured means that you’re borrowing money without putting anything up as collateral to “secure” the loan. These loans usually require a higher credit score to prove your creditworthiness.
- Manageable payments: You’ll get one lump sum that you pay back in installments over a set amount of months. Some lenders might even allow you to set a reasonable repayment amount based on your income and interest rate. But compare personal loan lenders before you make a decision, so you can find the right terms for your situation.
- Use the loan for whatever you want: You can typically take out a personal loan for whatever you need it for like home improvement or debt consolidation. A personal loan is exactly that: personal. It might be for debt consolidation, paying for a wedding, or covering old medical bills. But keep in mind that sometimes when you take out the loan for a specific purpose, some lenders might treat it differently. For example, if you take out a loan for debt consolidation, many lenders might require that you pay down your credit card debt by disbursing the funds directly to the current debt owner instead of giving you the money.
- Good credit score required: Most personal loans require a decent credit score to qualify. The lower your score, the less likely you are to qualify and if you do, the higher your interest rate will be.
- Steady income: You’ll need to prove you can afford to pay the loan back. If you don’t have a steady job with a reliable income, you may not get approved for a loan.
Secured personal loans are loans that need collateral — like your home or vehicle — to “secure” or take out the loan. If you default on your loan, the lender can seize the property you put up as collateral. Most personal loans are unsecured, but a home loan or car loan is a type of secured loan.
- Easier to get: Because you’re using something as collateral, secured loans are easier to take out for people with lower credit scores.
- Lower interest rate: Since there’s collateral, the lender views you as a less risky borrower, so interest rates tend to be lower on secured loans
- Property can get seized: If you don’t make on-time payments, your collateral can get taken away.
- Can be harder to find: Not all banks or lenders offer secured loans, so sometimes they can be a bit harder to find.
A revolving line of credit gives you access to money that you can borrow up to your credit limit. You’ll have a minimum payment due every month or you can pay off your balance in full. If you carry a balance, you most likely will have to pay interest on top of that amount. Revolving credit comes in the form of credit cards, a personal line of credit, or a home equity line of credit (HELOC).
- Manage your cash flow: If you’ve got bills that are due, but don’t get paid for a few weeks, revolving credit can help you pay those bills. A revolving line of credit can tide you over so you don’t fall behind on payments.
- Reward potential: Many credit cards offer incentives for use, like cash back, points, or other rewards.
- Monthly payment varies: What you owe every month depends on what you borrow. This amount can fluctuate based on how you use your revolving credit.
- Higher interest rates: Revolving credit, especially credit cards, tend to have the highest interest rates. So be sure you can pay off your balance in full each month or you’ll be stuck paying lots of money in interest.
Installment loans are loans that have a certain amount of payments and when you pay them back, your loan is paid in full. This is the opposite of revolving credit, where you can take money out and pay it back over the course of a few months or years, depending on your contract. Loans that have end dates are installment loans — like car loans, student loans, and personal loans.
- Monthly payment stays the same: If your installment loan has a fixed interest rate, your loan payment will be the same every month. Your budget won’t rise and fall based on your payments, which is helpful if you don’t have a lot of wiggle room for fluctuation.
- Stuck with the loan amount you borrow: Installment loans don’t allow you to go back and take out more in case you need it. If you end up needing to adjust your amount to borrow, you shouldn’t look into installment loans. Otherwise, you may need to take out another loan.
A fixed interest rate is a rate that doesn’t change over the life of the loan. Many installment loans offer this (like personal loans, student loans, and car loans).
- Interest rate never changes: A fixed interest rate means your monthly payments won’t change over the life of the loan. This can give you peace of mind that payments won’t change, so you can count on paying the same amount every month.
- Potentially higher payments: Fixed interest rates tend to be a little higher than variable interest rates. While a high credit score can get you lower interest rates, a fixed interest rate can still mean higher payments compared to variable interest rates.