The Top 7 Kinds of Personal Loans Explained

Personal loans allow you to borrow money for any purpose. They come in a variety of types, each with their own pros, cons, rates, terms, and uses In this comprehensive guide, we’ll explain the top 7 kinds of personal loans available, so you can determine which is best for your needs

Unsecured Personal Loans

The most common type of personal loan is an unsecured personal loan. This means it is not backed by any collateral like your home or car. The lender is taking on more risk by lending money without collateral, so interest rates tend to be higher than secured loan options.

Unsecured personal loans are approved based mainly on your credit score and income. Interest rates typically range from 5% to 36%. Loan amounts usually range from $1,000 to $50,000 and terms last from 1 to 7 years.

Unsecured personal loans can be used for almost anything – debt consolidation, emergencies, vacations, home improvements, medical bills, or any major expense Their flexibility and accessibility make them useful for many borrowers

Secured Personal Loans

Secured personal loans require an asset like your home, car, or savings account to secure the loan. If you fail to repay the loan, the lender can seize the asset to recoup their losses.

Because they are backed by collateral, secured loans are less risky for lenders. This results in lower interest rates, sometimes as low as 3-4%. Even borrowers with bad credit can potentially qualify for secured personal loans.

The downside is you risk losing your home, car, or savings if you default. Make sure the benefits of a lower rate outweigh this risk before choosing a secured loan.

Peer-to-Peer Loans

Peer-to-peer lending connects borrowers directly with individual investors who fund the loan. By removing the middleman, interest rates can be lower for borrowers and returns higher for investors.

To qualify for a peer-to-peer loan, you’ll need good to excellent credit, with FICO scores of 640 or higher. Interest rates range from 5-35% based on your creditworthiness. You can borrow between $1,000 and $40,000 with terms from 3 to 5 years typically.

Peer-to-peer lending offers competitive rates and an easy online application process. Just be aware that investor funding can take 1-2 weeks on average.

Payday Loans

Payday loans provide fast cash – often by the next business day – in small amounts ranging from $100 to $1,000. To qualify, you only need proof of income and a checking account in good standing.

The catch is payday loans charge extremely high interest rates, from 300% to as much as 800%. And the repayment term is very short, usually by your next paycheck in 2 to 4 weeks.

This makes payday loans very risky. Most borrowers struggle to fully repay their loan by the due date, forcing them to take out new loans repeatedly. Only use payday loans as an absolute last resort.

Title Loans

Title loans allow you to borrow against the equity in your car. To qualify, you simply need clear car title and proof of income. Loan amounts range from $100 to $5,500 typically. And you get to keep driving your car during repayment.

But failing to repay a title loan means the lender can repossess and sell your car to recover their money. Interest rates are also sky-high, averaging around 300% APR. Title loans should be avoided if possible, due to their risks.

Cash Advance Apps

Cash advance apps like Earnin, Dave, and Brigit let you borrow small amounts – usually $20 to $200 per pay period. There are no credit checks. Rather, the app links to your bank account to evaluate income and determine repayment ability.

While convenient, the fees can add up fast. There is usually a monthly membership fee around $10, as well as a “tip” of up to $20 per borrowed amount. Effective APRs are well over 100%. Use cash advance apps sparingly.

Credit Card Cash Advances

Most credit cards allow you to withdraw cash either from an ATM or bank teller. This is treated as a cash advance, with interest accruing immediately.

The downsides are high interest rates around 25% or more and cash advance fees of 3-5% of the amount borrowed. It should only be considered in an emergency if you’ve exhausted cheaper borrowing options.

5 More Types of Loans to Avoid

While the loans above are commonly used, there are certain types that should be avoided due to their predatory and risky nature:

• Auto title loans – Allow you to borrow against the title of your paid off car. Extremely high interest rates that can lead to repossession.

• Payday installment loans – Require repayment in multiple installments, but still have triple-digit interest rates like payday loans.

• Pawn shop loans – Receive cash for pawning your valuables to the shop. Up to 200% APR and you risk losing your belongings.

• Tax refund loans – Offer a cash advance on your tax refund but cut heavily into the amount with fees.

• 401(k) loans – Allows you to borrow against your retirement savings. Strict repayment rules and hampers your retirement progress.

How to Choose the Best Personal Loan

With so many types of personal loans available, how do you choose what’s best for your situation? Here are a few tips:

• Determine how much you need to borrow and for what purpose. Then find options that allow that loan amount and use.

• Consider both secured and unsecured loans, weighing the pros and cons of each for your situation.

• Compare APRs across multiple lenders. Aim for the lowest rate possible for your credit profile.

• Opt for the longest loan term you can afford to keep monthly payments affordable.

• Read all loan terms carefully and make sure you can adhere to the repayment schedule.

• Avoid any loan with extremely high APRs or prepayment penalties.

• Only borrow what you can reasonably afford to repay to avoid default.

The Bottom Line

From unsecured loans to cash advances, there are many financing options to choose from. But it’s important to weigh the costs and risks of each type of personal loan for your circumstances. Following the tips above will help you identify the kind of personal loan that strikes the right balance between the amount you need, an affordable payment, and favorable terms to set you up for success.