Whether your hot water heater breaks or your insurance company declines that medical procedure you scheduled, there are times when you need to come up with a lump sum of cash quickly. If you don’t have enough money in your savings account, a personal loan can be a helpful option.
There are many types of personal loans, each with its own set of pros and cons. Keep reading to learn about the different types of loans so you can decide which one is right for you.
What Is a Personal Loan?
Personal loans allow you to borrow a fixed amount of money, which is then repaid over a set period of time (usually three to five years, but longer terms are also available).
Compared to credit cards, personal loans can be appealing when you need to finance a major purchase. They usually have lower annual percentage rates (APRs) than credit cards, and you can make payments over several years.
7 Common Types of Personal Loans
Personal loans are available from banks, credit unions, and online lenders. Depending on the lender, you may see several different types of personal loans advertised. Here are seven of the most common types of personal loans:
1. Unsecured Personal Loans
Unsecured personal loans are typically offered by commercial banks. When lenders review your loan application, they decide whether to lend to you based on your creditworthiness – which includes your credit history, income, and existing debt – to determine your ability to repay the loan. There is no collateral with an unsecured loan, and as a trade-off, interest rates are typically higher than with secured loans.
Depending on which lender you choose and your credit score, unsecured loans are available in amounts ranging from $500 to $100,000.
2. Secured Personal LoansÂ
Most personal loans are unsecured, meaning you don’t have to provide your valuables to serve as collateral. However, some lenders do offer secured personal loans, such as home equity loans, which use your property as collateral. If you fall behind on your payments and default on the loan, the bank can seize your property and sell it to recoup their money.
If you have less-than-perfect credit or need a large loan amount, opting for a secured loan can improve your chances of qualifying for the loan.
Because those who opt for secured loans tend to have lower credit scores, the maximum loan amounts are usually smaller than you’d find with unsecured loans. In general, secured loans are available in amounts of $50,000 or less.
3. Cosigned and Joint Personal LoansÂ
If you aren’t able to qualify for a loan on your own, some lenders allow you to apply with a cosigner or joint applicant. This is someone with good-to-excellent credit and a steady source of income who applies for a loan with you. By signing the loan application, they are jointly responsible for the loan’s repayment. Because they share the legal obligation to repay the loan, it’s less risky to the lender, so you are more likely to qualify for a loan with a cosigner than on your own.
Cosigned and joint application loans can range in amount, but you can usually apply for loans of $500 to $100,000.Â
4. Buy Now, Pay Later (BNPL) Loans
BNPL loans are a relatively new form of credit. You may have seen services like Affirm, Afterpay, or Klarna when checking out with major retailers. The model is simple: BNPL services allow you to purchase and receive items now, then spread out the payments over several weeks or even months.
BNPL services tend to have shorter repayment terms than other personal loans — often just six weeks — but they usually offer low APRs and fees.
BNPL loans tend to be for smaller loan amounts than other personal loans. You can typically use a BNPL loan for purchases as small as $50.
5. Home Improvement Loans
If you are thinking of tackling home improvement projects, you may be shocked by the projected cost. According to the National Association of Realtors, these are the average costs of some common projects:
- Closet renovation: $6,000
- Complete renovation of a kitchen: $80,000
- Installing new vinyl windows: $30,000
Rather than digging into savings or tapping into home equity, personal loans can be a useful financing alternative.
Home improvement loans are a type of personal loan that are specifically designed for home renovations. They are usually unsecured, and some lenders offer longer repayment terms on home improvement loans than they do for other personal loans. For example, some lenders offer repayment terms as long as 12 years. Â
6. Debt Consolidation Loans
If you’re like many people, you may struggle with credit card debt. According to Experian, the average credit card balance for Americans was $5,221  in 2021. With high interest rates on credit cards, it can be difficult to get a handle on your debt.
Debt consolidation loans are a type of personal loan that can be used to combine your existing debt into one loan. You can use the loan to pay off your current accounts, and if you have good credit, you may qualify for a lower interest rate on the debt consolidation loan than you had on your credit cards. With a lower rate, using a debt consolidation loan to manage your credit card balances could help you save money.
7. Medical Loans
Medical procedures can be expensive, especially if you don’t have health insurance or the procedure isn’t covered by insurance. For example:
- Lasik eye correction surgery costs between $2,000 and $3,000 per eye
- Dental braces usually cost between $3,000 and $7,000
- Gastric bypass surgery averages $23,000
While you could save money to pay for those procedures upfront, a personal loan may be a better option. You can usually finance $500 to $50,000, but some lenders offer even larger loan amounts.
Pros and Cons of Personal Loans
Before applying for a personal loan, consider both the advantages and drawbacks of this form of credit:
Pros
- You usually don’t need collateral: Most personal loans are unsecured, so you don’t have to use your car or house as collateral.
- You can have several years to make payments: Generally, personal loans give you two to five years to repay the loan, which can allow for a more affordable monthly payment.
- They usually have lower rates than credit cards: The rates on personal loans are typically lower than credit card rates. As of May 2022, the average rate for a personal loan with a 24-month term was 8.73%. For credit cards, the average rate was 16.65%.
Cons
- You usually need good-to-excellent credit: To qualify for a personal loan with a rate under 10%, you will need good-to-excellent credit. If your credit is fair or poor, you may struggle to qualify for a loan.
- They don’t solve the problem: Personal loans don’t solve cash flow or spending issues. If you use a personal loan to consolidate debt, it doesn’t fix the problem — it only moves it into another format.
- May have origination fees: Some lenders charge origination fees that significantly increase the overall cost of the loan. Depending on the lender, origination fees can be as high as 10%.
Expenses come at you hard.
Taking Out a Personal Loan
To apply for a personal loan, follow these steps:
1. Improve Your Credit
To qualify for a personal loan, you’ll typically need good credit, meaning a score of at least 670. Review your credit report to ensure your information is accurate and spend some time working on your credit. Pay down existing balances and make all of your payments on time to strengthen your credit score.
2. Calculate How Much Money You Need
Before applying for a personal loan, determine how much money you actually need. You can usually borrow up to $50,000, but some lenders offer higher loan maximums. While it can be appealing to take out more than necessary to cover other expenses, that can be a risky strategy. A higher loan amount means a higher monthly payment, and you’ll pay more in interest.
3. Shop Around
Rates and terms can vary significantly from lender to lender, so take some time to compare your options. In addition to rates, look at the repayment terms and any fees that may apply. Be sure you understand all of the terms before signing on the dotted line.
[Tip: You can use Purefy’s rate comparison tool to quickly compare personal loans from multiple lenders.]
4. Submit an Application
Most lenders allow you to apply online. The lender will ask for the following information:
- Name
- Address
- Phone number
- Email address
- Income
- Employer contact information
- Loan purpose
- Desired loan amount
You will also have to consent to a hard credit check, which can affect your credit score. Many lenders offer same-day loan decisions, so you should get an answer quickly.
5. Wait for Loan Disbursement
Loan disbursement times vary by lender. Some take a few days to process your loan and disburse funds, while others offer same-day disbursements.
Is a Personal Loan Right for You?
After considering the types of personal loans available, the pros and cons of personal loans, and what it takes to apply, you can decide if a personal loan is right for you. If you’re ready to start shopping around, Purefy’s personal loan comparison tool is a great place to start. You’ll see accurate rate and repayment options up front, without affecting your credit, and you can apply online.
