Types of Personal Loans: Pros, Cons, and Best Uses

Any US citizen may seek financial aid, regardless of income or social standing. This is because major purchases and unforeseen bills often arise when you least expect them—when your pockets are empty. Are you planning a big event, dealing with a toothache, your auto insurance has expired, or your refrigerator has broken down? Getting a consumer loan is the best way to meet these needs.

Personal loans come in various forms, even though most are installment loans with set monthly repayment schedules. Joint, debt consolidation, BNPL, secured, and unsecured loans are just a few examples. Your credit score, loan purpose, the required amount, and the loan duration will determine your ideal loan.

What is a Personal Loan?

A personal loan allows you to borrow money for a predetermined period and repay it with fixed monthly payments. It can be used for any purpose, unlike a mortgage or student loan, which are intended for real estate purchases or education-related expenses.

Banks, credit unions, and online lenders offer personal loans. Banks and credit unions usually require a solid income and an excellent credit history and also run a thorough credit check, which deducts a few points from your credit score at the application stage. Loans from online lenders are often available without a hard credit check, but higher interest rates can offset this advantage.

In most cases, personal loans have fixed rates and monthly payments that don’t fluctuate throughout the loan term. Additionally, some lenders may charge a fee for creating or managing the loan. However, if you repay the loan early, there are no extra costs or penalties.

Different Types of Personal Loans

There are many types of personal loans, and choosing the best one for you depends on your specific needs, financial situation, and creditworthiness.

Unsecured Personal Loans

Collateral is unnecessary for unsecured personal loans, so you can obtain the money without having to pledge a valued item like your home, car, or other asset. 

The borrower’s income, credit, and financial history influence the loan approval process. These variables also affect the loan amount, interest rate, and terms. Loan amounts normally vary from $1,000 to $50,000, and the repayment periods range from 1 to 7 years. Interest rates are usually set between 8% and 36%.

An unsecured personal loan is suitable for people with a high credit score (670 and above), those who need funds to cover emergency expenses, and those who do not want to risk their personal assets.

Pros

• Since no collateral is required, you won’t risk losing a valuable asset during financial difficulties.
• Approval can take a few days with banks and credit unions, but it may be granted within 24 hours with online lenders.
• Funds can be used for various purposes, such as debt consolidation, home and car repairs, medical expenses, or large purchases.

Cons

• Without collateral, lenders face greater risk and charge higher interest rates, especially for borrowers with lower credit scores.
• Lenders require a high credit score and a stable income to qualify.
• Compared to secured loans, unsecured loans often have lower borrowing limits.

Secured Personal Loans

Secured personal loans require collateral, such as a valuable item or real estate. Collateral reduces the lender’s risk, allowing them to offer better interest rates. Loan amounts can vary widely, often from $5,000 to $100,000 or more, with the repayment terms sometimes reaching 30 years. Interest rates are typically lower than those on unsecured options. They can start at 3% APR, depending on the collateral value and the borrower’s creditworthiness.

This loan is worth considering for people who own assets and can use them to get more favorable loan terms or higher loan amounts. Borrowers with a bad credit history can also consider a secured loan to increase the chance of approval or get lower interest rates.

Pros

• Because the loan is secured by collateral, lenders are willing to offer better interest rates.
• Borrowers can qualify for larger loan amounts due to the reduced risk for the lender.
• Even people with low credit scores can qualify for the loan.

Cons

• If the loan is not repaid, the lender can seize the collateral to recover the financial loss.
• The collateral review and appraisal process may take longer.
• Some types of assets cannot be accepted as collateral. Each lender’s terms may vary.

Debt Consolidation Loans

Debt consolidation loans combine multiple debts into a single loan with a fixed interest rate. This may simplify repayment and lower your overall interest rate. The typical loan amounts and terms are $2,000 to $100,000 and two to seven years, respectively. Interest rates usually fall between 6% and 36%.

A debt consolidation loan is worth considering for people with high-interest debt who want to optimize their monthly payments.

Pros

• It is much easier to manage one monthly payment than multiple payments to different creditors.
• Debt consolidation often lowers interest rates, especially when consolidating high-interest debts such as credit cards.
• Making payments on time improves your credit score.

Cons

• You need an excellent credit score (between 720 and 850) to get a favorable interest rate.
• By extending the repayment period, borrowers may accumulate even more debt.
• Lenders may charge a loan origination fee ranging from 1% to 5% of the loan amount.

Cosigned and Joint Loans

These personal loans require a third party to back your application. There are two types of guarantees: cosigners and co-borrowers. A cosigner agrees to repay the debt if the principal borrower defaults, while a co-borrower shares equal repayment responsibility from the very beginning.

Loan periods can range from one to seven years, and loan amounts can vary greatly, usually from $1,000 to $100,000. Interest rates typically range from 5% to 36% and are determined by the creditworthiness of both applicants.

Borrowers with limited or bad credit history and people needing a large loan can rely on such loans.

Pros

• If the cosigner has a good credit history, it may lead to lower interest rates and a higher loan amount.
• The primary and co-borrowers can improve their credit scores by making timely loan payments.
• Co-borrowing can be beneficial if one person’s income is temporarily reduced.

Cons

• If the debt is not repaid on time, it can impact both parties’ credit scores.
• Financial strain can lead to personal conflicts if payments are missed.
• The loan will appear on the cosigner’s credit report and may affect their credit utilization and debt-to-income ratio.

Buy Now, Pay Later Loans

With BNPL loans, buyers can make a purchase and spread out its cost over time—often in bi-weekly installments. Retailers typically offer them at the time of sale. The typical loan amounts range from $50 to $1,000. Once the loan is approved, you make a small down payment, around 25% of the total purchase price. The remaining balance is paid in interest-free installments, typically over a few weeks or months. The interest rate spectrum is from 0% to 30%.

BNPL loans are relevant for people who need immediate money to purchase specific goods and prefer short-term financing over long-term ones.

Pros

• Some providers offer interest-free BNPL options if payments are made on time.
• Some service providers do not require a credit check, making it accessible to people with bad credit.
• Available at checkout from most major retailers.

Cons

• Fees can be high if a payment is missed or delayed.
• Ease of financing can lead to buying more than you can afford.
• Missed payments may be reported to the credit bureaus, affecting the borrower’s credit score.

Personal Line of Credit

A personal line of credit provides access to a specific amount of money that you can borrow up to your credit limit. Interest is paid only on the amount you use. Credit limits typically range from $5,000 to $100,000, with variable interest rates ranging from 5% to 20% for terms of 2 to 7 years.

Individuals who need flexible access to funds, people with variable expenses, and borrowers with a good credit history can obtain a personal line of credit.

Pros

• Borrowers can use funds as needed and repay them on a flexible schedule.
• Interest is charged only on the borrowed amount, not the entire credit limit.
• The line of credit can be reused after repayment, providing ongoing access to funds.

Cons

• Payments may become unpredictable if interest rates rise.
• Favorable terms often require a good credit history.
• Easy access to funds can lead to irresponsible borrowing and increased debt.

Bad-Credit Loans

This type of personal loan is usually offered by online lenders and is intended for borrowers with a bad credit history. High interest rates characterize it. Loan amounts range from $500 to $10,000, and terms range from several months to 5 years. Interest rates can be very high, ranging from 15% to over 100%.

This type of loan is available to people with low credit scores who need money urgently, borrowers who want to improve their creditworthiness, and those who do not have access to traditional lending options.

Pros

• Available to those who cannot qualify for traditional loans due to poor credit history.
• Making payments on time can help improve a borrower’s credit score.
• Approval can often be faster compared to traditional loans.

Cons

• Lenders charge higher rates to compensate for the increased risk.
• Some lenders engage in predatory lending by offering unfavorable terms.
• Collateral may be required, especially if large amounts are involved.

Fixed-Rate Loans

Fixed-rate loans have an interest rate that remains unchanged for the entire loan term. Monthly payments are predictable and do not change over time. Loan amounts can range from $1,000 to $100,000, with the repayment terms of 1 to 10 years. Interest rates typically range from 5% to 30%. 

Borrowers who prefer stable monthly payments and are willing to pay over a long period can obtain this type of loan.

Pros

• Monthly payments remain the same, making budgeting easier.
• Borrowers are protected from potential interest rate increases.
• Fixed payments allow you to calculate your overall loan cost and contribute to long-term financial planning.

Cons

• Fixed rates may initially be higher than those of adjustable-rate loans.
• Borrowers do not benefit if the market interest rate decreases over time.

Variable-Rate Loans

Such loans are characterized by an interest rate that may fluctuate depending on market conditions. Monthly payments may increase or decrease depending on rate changes. Loan amounts can range from $1,000 to $100,000, with the repayment terms ranging from 1 to 10 years. Interest rates can start at 4% but can rise significantly over time.

Variable-rate loans are suitable for borrowers who are satisfied with a floating interest rate, plan to repay the loan quickly, or expect interest rates to decrease.

Pros

• Typically, floating rates start below fixed ones.
• If market rates fall, your loan interest rate may decrease.
• It may benefit borrowers who plan to repay their loans quickly.

Cons

• Monthly payments can fluctuate, making budgeting difficult.
• If market rates rise, your loan interest could increase significantly.
• Understanding how the rate changes and its impact on payouts can be tricky.

Risky Loans: Why You Should Avoid Them

The following loan types should be used as a last resort, and it is better to avoid them altogether due to their predatory nature. 

Cash Advance Apps

Loan apps make borrowing available via your smartphone in a few taps. The loan has to be paid back before the next paycheck. You do not need to submit your credit history details to receive cash through the application.

This tool can be used to obtain a small loan, usually not exceeding $300 or $500. Many apps offer interest-free options. However, they also come with several risks. Keep in mind that some applications have membership or application costs.

Credit Card Cash Advance

Many issuers let borrowers obtain a short-term cash loan at the store or via an ATM using their credit cards. This is an easy way to receive cash, but it costs a lot.

Interest rates are generally higher than those for regular credit card purchases—usually between 24% and 36% APR. Interest starts to accrue right away. Furthermore, there may be a cash withdrawal fee, which is often a fixed amount (typically between $5 and $10) or up to 5% of the withdrawn sum.

Pawnshop Loan

This is a secured loan. To get one, you need to visit a pawn shop and provide your assets, such as appliances or jewelry, as collateral. The appraiser determines the approximate value of the offered item (note that the offered price will be much lower than the real one), and you leave your asset at the pawnshop. If you do not return the money, the pawnshop can sell your asset to recoup the financial loss.

Rates on pawn loans can reach approximately 200% per annum. However, the loan is usually paid off within 30 to 60 days. Your credit score won’t suffer if you default on your loan, but you will lose your deposit.

Payday Loans

These are short-term, high-fee loans typically available for up to $1,000 with no hard credit checks. States have different payday loan laws, so amounts may vary. Some states even prohibit payday loans due to their unfavorable terms.

The borrowed amount usually must be repaid when you receive your next paycheck. The interest rate exceeds 400%. All these can lead to an inability to repay the debt on time and, as a result, to a debt cycle.

Title Loans

A title loan is a secured loan that uses your car as collateral. If you fail to repay the loan, you risk losing your car.

The loan amount can range from $100 to $10,000, depending on the car’s value (up to 50% of its cost). These loans are short-term, usually lasting up to 60 days. Interest rates are high, often around 25% per month (equivalent to 300% per annum).

Common Uses for Personal Loans

Personal loans are versatile financial tools that can be used for various purposes:

1. Consolidation of debt. Combining several obligations into a single loan with a lower interest rate simplifies payments and lowers total interest expenses.
2. Renovations in the house. Personal loans can help you finance home improvement projects like kitchen makeovers, bathroom additions, or energy-efficient home renovation.
3. Large purchases. Financing expensive goods like electronics, furniture, appliances, and even cars.
4. Medical costs. This includes dental care, prescription medications, and other health-related costs that insurance does not fully cover.
5. Education. You can use a personal loan to pay for education-related costs such as books, tuition, and others that savings or student loans may not cover.
6. Wedding costs. Personal loan can finance the whole cost of a wedding, including the location, catering, clothes, rings, and other related expenses.
7. Holidays. Financing the vacation or excursion cost.
8. Moving expenses include hiring movers, renting a moving vehicle, and setting up a new residence.
9. Beginning or growing a business. Supplying money to launch a new venture or grow an established one.
10. Emergency expenses, such as auto repairs, essential house repairs, or other unanticipated financial needs.
11. Personal projects. Use the funds to finance hobbies and activities that require a significant financial investment, such as starting a home garden or taking classes for personal enrichment.

Ways to Improve Your Credit Score for Better Loan Terms

A high credit rating is the key to favorable lending conditions. Therefore, it is better to start building or improving your credit score now. To do this, just follow a few steps:

Check Your Credit Reports Regularly

Equifax, Experian, and TransUnion are the credit bureaus from which you can obtain information on your credit score. It is important to thoroughly review the report for flaws; if any are discovered, raise a dispute.

Pay Your Bills on Time

If you have active loans, make sure to pay your bills promptly. It is recommended that you set up autopay so that you won’t miss the due date. Late payments have a great impact on your credit score, so try to avoid them as much as possible.

Reduce Outstanding Debt

Focus on paying off large credit card and loan balances. Keep your credit utilization ratio below 30%, as a lower ratio positively impacts your credit score.

Avoid New Credit Applications

Applying for a new loan reduces your credit score by a few points, so try not to apply for too many at once. Before applying, consider getting pre-qualified with lenders so you know what kind of terms to expect from the loan.

Increase Your Credit Limits

Request a higher credit limit on existing credit cards. However, try not to increase your expenses, as this may negate the benefits.

Keep Old Accounts Open

The length of your credit history influences your credit score, too. Don’t rush to close accounts you don’t use. Leaving them open will enable you to keep a longer credit history, raising your credit score.

Diversify Your Credit Mix

A mix of credit types, such as credit cards, mortgages, and auto loans, can improve your credit score by showing that you can manage different credit accounts. But be cautious. Don’t take on new debt solely to diversify your credit mix, as unnecessary debt can be detrimental.

Negotiate with Creditors

If you struggle to pay your debts on time, talk to your creditors and request a postponement or term modification. Lenders might propose a flexible repayment schedule or reduce your interest rate.

Use a Secured Credit Card

You might choose to use a secured credit card if you have no credit history or a low credit score. Make consistent, on-time payments to increase your credit score or establish first entries in your credit history.

Become an Authorized User

Ask a trusted person with good credit to add you as an authorized user to their account. Their positive payment history can help improve your credit score without requiring you to take on additional debt.

Use Credit Counseling Services

Consult trustworthy credit counseling organizations. They will assess your specific financial circumstances and assist you in developing a plan to raise your credit score and manage your debt more effectively.

Step-by-Step Guide to Applying for a Loan

This is typically how the process works:

1. Check Your Credit Rating 

Knowing your score will help you choose a loan option for which you can qualify. People with good credit are usually eligible for almost any loan type. Those with a lower score may consider secured loans or joint options. They can also turn to online lenders who don’t do rigorous credit checks, but be aware of the predatory lending practices of some loan providers.

2. Obtain Prequalification

After determining your FICO score, you can pre-qualify from several lenders to learn more about their offers. Your credit score won’t decrease because of this process, allowing you to obtain indicative offers without a hard credit check. You will be asked to specify personal information, address details, bank account number, proof of income and employment, loan purpose, and the desired amount to find out what terms you may expect.

3. Compare Offers From Different Lenders

When choosing a lender, it is important to consider the following aspects:

1. Annual interest rates. The lower the APR, the more profitable the loan will be since the overpayment will be minimal.
2. Available loan amounts. Determine the loan purpose and the exact amount you need. Then, choose a lender willing to lend you this amount.
3. Length of loan. A short loan term means higher monthly payments but less total interest.
4. Credit check. Find out if the lender does a hard credit check. Submitting a formal application may temporarily lower your credit score, so make an informed decision.

Use the BadCredify platform to select a lender, but remember that approval is not guaranteed.

4. Compile the Essential Documents

Once you have chosen a lender, gather all the necessary documents. The list of required papers may vary depending on the lender but usually includes the following basic documents:

• Proof of income. These could be pay stubs or bank statements.
• Certificate from the place of work. A document confirming your employment.
• Proof of identity.
• Address confirmation. A document confirming your place of residence.

5. Submit a Formal Loan Application and Receive Money

Remember that while some lenders base their decisions only on your income and payment history, others thoroughly review your credit report details. Make sure to verify this beforehand. The process may take from several hours to a few business days.

If approved, you will need to review your final loan terms. Then, if you accept them, sign the loan agreement. Depending on the lender’s terms and circumstances, you can receive funds within 1–5 working days.

Bottom Line

Personal loans come in various forms, each with their pros and cons. Before applying, it’s critical to understand how they work and what to expect. Thoroughly research various lenders to find the ideal loan option for your needs.

FAQ

What Personal Loans Do I Qualify For?

Assessing your credit score, income, and financial history is necessary to determine the kinds of personal loans you can be eligible for. You might be eligible for most loans if your credit score and income are high. If you’re looking for unsecured loans but have bad credit, consider small personal loans offered by online lenders. Adding a co-signer or collateral can improve your chances of getting approved and help you get better terms.

What is the Most Common Type of Personal Loan?

The most common type is an unsecured personal loan.

What Type of Loan is Easiest to Get?

Payday loans are typically the easiest loans to get. However, be aware of their high APRs and short repayment terms.

Can I Hold Different Loans at Once?

You can get several loans at a time if you meet the lender’s requirements. However, some states may have restrictions regarding the number of short-term, high-interest loans you can have.

What are the personal loan terms?

Standard personal loan terms include amounts from $500 to $100,000, 2 to 7 years repayment periods, and interest rates from 6 to 36%.

Related Posts

What Credit Score Is Needed for a Personal Loan?

Larry Henderson

LARRY HENDERSON, FINANCE EXPERT AT BADCREDIFY

Larry brings over 20 years of experience to the field. Prior to joining our team, he worked as a journalist for CNBC, Money, USA Today, and others