Types of Personal Loans: Find the Loan That Fits Your Needs
Personal loans can provide fast financing when you need money, but with so many options available, it's important to understand the different types of personal loans and their best uses.
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Here are six types of personal loans, including unsecured and debt consolidation loans, plus insights on when each can be most beneficial for your specific needs.
Unsecured personal loans
Unsecured personal loans do not require collateral. Instead, lenders consider factors like your creditworthiness, income and debt to qualify you.
Unsecured personal loans are most commonly used for debt consolidation, home improvements and emergency expenses. They can also help fund weddings and medical procedures not covered by insurance.
Secured personal loans
Secured personal loans require collateral — like a car or savings account — to back the loan. Providing collateral makes the loan less risky for the lender. In turn, you may get a lower interest rate with a secured loan.
Secured personal loans may be an option for consumers with low credit scores or limited credit history. Keep in mind that defaulting on a secured personal loan means you could lose your collateral.
Small personal loans
Small personal loans range from a few hundred to a couple thousand dollars, and repayment terms may be a few months to a year or two. They can be used for emergencies or repairs on your home or car.
Look for small loans with annual percentage rates below 36%. Loans with higher interest rates can catch borrowers in a cycle of debt if they become difficult to repay.
Debt consolidation loans
If you have multiple high-interest debts, consolidating them into a single loan with one monthly payment can make it easier to manage your debt. You may also save money on interest and pay off your debt faster.
Debt consolidation loans are best suited for individuals who want to simplify their debt repayments and who qualify for a rate that’s lower than the combined rate on existing debts.
Co-sign and joint loans
Co-sign and joint loans both involve adding a co-applicant to your personal loan application. They can be good options for borrowers with low credit scores because adding someone with stronger credit or higher income can boost your chances of qualifying or get you a lower rate.
Co-applicants agree to repay the loan if you don’t, and any missed payments will hurt both your credit scores.
Payday loans
Payday loans are small, short-term loans typically repaid by your next paycheck. They have fees that translate into triple-digit interest rates, making them exceptionally expensive and risky for most borrowers.
Consider a payday loan only as a last resort after you’ve exhausted all other options. If you do take a payday loan, make a plan to repay it on time.
With any type of personal loan, always compare options from multiple lenders, review interest rates and fees, and read the loan terms and conditions carefully before making a decision.