If you need to borrow money, you might consider applying for a personal loan. You can use a personal loan for all sorts of things but given the different types of personal loans out there, knowing which to use for different purchases can be difficult.
What Is a Personal Loan?
A personal loan is a flexible loan that you can use for a wide variety of purposes. Unlike loans designed for a specific thing, like a mortgage or auto loan, a personal loan can be used for nearly any legal purpose.
There are different types of personal loans. One of the most basic distinctions is between secured and unsecured personal loans.
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Unsecured Personal Loan
Unsecured personal loans are one of the most common types of personal loans, and most personal loans you see advertised will fall into this category.
An unsecured personal loan doesn’t require any collateral. The lender offers the loan based purely on your credit history, financial situation, and a promise that you’ll repay the loan. This contrasts with secured loans, like mortgages, where an asset serves as collateral for the loan.
The obvious benefit of unsecured personal loans is that you don’t need to have anything of value to offer as collateral. You also don’t have to go through the process of letting the lender examine your collateral and make sure it’s worth enough to secure your loan, which can speed up the lending process.
However, because there’s no collateral, lenders are more choosey about offering these loans. You’ll need strong credit to qualify for these loans, and your interest rate will be higher than it would be with a secured loan.
👉 Learn more: Find out exactly what documents and information you need to apply for a personal loan with our comprehensive guide.
Secured Personal Loan
Secured personal loans are the opposite of unsecured personal loans. When you apply for one of these loans, you need to offer a form of collateral.
Many lenders will accept a Certificate of Deposit (CD) or savings account balance as collateral for these loans. For example, if you have $5,000 in a CD at a bank, that bank may be willing to offer you a secured loan. The size of the loan that you can qualify for will depend on the value of your collateral and your credit score.
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Because you’re offering collateral to secure the loan, secured personal loans are generally easier to qualify for. Many lenders will also offer lower interest rates on these loans because of the reduced risk that they face.
A major drawback of secured personal loans is the fact that you need to have something of worth to serve as collateral. If you’re in need of a loan, odds are good that you don’t have much savings available and might not have enough to serve as collateral.
Offering something as collateral also puts it at risk. If you’re not able to make payments on your loan, the lender could take possession of the collateral.
It may also take longer to get a secured loan because the lender has to assess your collateral and ensure it’s worth enough to secure the debt.
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Branded Personal Loans
If you’re shopping for personal loans, you may find that some lenders offer specialized or branded personal loans. For example, you may see loans described as vacation loans, home renovation loans, or debt consolidation loans.
These loans are advertised as special types of personal loans for a specific purpose. Some of these loans may offer special features related to their branded purpose. For example, if you apply for a debt consolidation loan the lender may pay your other creditors directly, so you don’t need to handle the money at all.
Keep in mind that personal loans are highly flexible. You can use a personal loan for almost any purpose; the few that are disallowed by most lenders are things such as paying for education, gambling, or illegal activities.
Some branded personal loans may be a good deal. You might find a debt consolidation personal loan that can help you save a lot of money. However, just because a loan is described as being good for a specific purpose does not mean that it is the best loan available. Always shop around and consider generic personal loans before going for a branded one to make sure that you’re getting the best deal.
Bad Credit or No Credit Check Personal Loans
Another common thing to see when looking for personal loans is a loan advertised as a bad credit or no credit check personal loan. These may seem appealing, especially If you don’t have a great credit score or have struggled to get approved for loans in the past.
As with anything, you pay a price for these types of loans. Lenders who are willing to offer loans to people with poor credit or without checking people’s credit need to compensate for that risk somehow. Often, they compensate for that risk with highly unfavorable terms such as high interest rates or large origination fees.
If you need a personal loan, but don’t have good credit You should still avoid these loans due to their predatory terms. You’ll get a much better deal if you are able to qualify for a secured personal loan. If you don’t have enough assets to serve as collateral, you are likely to be better off if you spend some time working to improve your credit and apply for a traditional personal loan instead.
👉 Learn more: Learn the step-by-step process of securing a personal loan with a co-signer in our comprehensive guide.
A payday loan is a type of bad credit or no credit check loan. They share some characteristics with personal loans, but it is important to know that payday loans are highly predatory and should be avoided whenever possible.
Like bad credit or no credit check personal loans, payday lenders typically don’t look at your credit score when you apply for a payday loan. These loans have massive fees High interest rates and short repayment periods. For example, if you get a payday loan today, you might be expected to pay it off in 2 weeks. The idea is that you use the loan to make it the next payday and use your next paycheck to pay back the balance.
Payday loans typically come from specialized lenders, so if you look for loans from reputable Banks and online lenders, you are not likely to find them. Their high fees and interest rates can make it easy to get trapped in a cycle of debt, so try to avoid these loans except as a very last resort
Other Types of Consumer Loans
Personal loans are a type of consumer loan, which is a wide category of loans that describes pretty much any type of loan that a regular person could apply for. Some examples include personal loans, mortgages, auto loans, and credit cards.
When looking to borrow money, it’s important to make sure that you’re applying for the right type of loan. Some types of purchases, such as a home or a car, have unique loan types designed specifically for those purchases. Trying to use a credit card or a personal loan will likely result in you paying more than if you used a specially designed loan.
Personal Lines of Credit
Personal lines of credit are similar to personal loans in many ways. Like personal loans, they’re highly flexible and can be used for many different purposes. They can also come in both secured and unsecured varieties.
What makes them different is that a line of credit is a pool of funds that you can draw from multiple times while a loan is a lump sum of cash that you can only access once.
That makes personal lines of credit more useful for people who have unpredictable financial needs. If you have a one-time expense and you know the size of that expense, you can apply for a personal loan for the correct amount. With a personal line of credit, you can take money out of the line of credit when the need arises and do so multiple times if you find that you need to draw money more than once.
For example, a personal loan might be a good fit if you have to pay an unexpected bill. A personal line of credit might be a better fit for someone working on a home improvement project who isn’t sure exactly how much it will cost.
Common Uses for Personal Loans
Personal loans can be used for many different reasons.
One of the most common reasons is for debt consolidation. If you have multiple credit card balances and other small loans, you can use one personal loan to pay off those balances. That leaves you with a single monthly payment to make and may reduce the amount of interest you pay.
Home renovations and vehicle repairs are also common uses for personal loans.
You can also use a personal loan for unexpected expenses. Because they have lower interest rates and credit cards tend to, using a personal loan in this way may help you save money.
Many people use personal loans for weddings, vacations, and similar costs. Be careful: you’ll be paying off that loan long after the party or the trip is over!
🚨 Learn more: Learn how to protect yourself from personal loan scams by recognizing the warning signs in our latest guide.
Personal loans are highly flexible loans that you can use for a variety of purposes. There are many types of personal loans, but they all offer money that can be used for a range of personal needs.
If you need money for something, applying for a personal loan can be one way to get that cash. Just keep in mind that you will be paying that loan back with interest. It’s best to use these loans for essentials, not luxuries, and to avoid borrowing if your credit isn’t up to par!