A personal loan is money you borrow from a lender and repa📖y in monthly installments. You repay the loan with interest over a specified period, usually between one to five years.
You can use a personal loan for many reasonܫs, including home improvements, 🐲medical expenses, and debt consolidation.
Let’s take a clo🌄ser look at the most common personal loan types so you understand which one is best for you.
- What are the most common personal loan types?
- Secured vs. unsecured loans
- Loan options to avoid
- What are the pros of personal loans?
- What are the cons of these loans?
- Personal loan lender comparison
- Alternatives to personal loans
- Frequently asked questions
What are the most common personal loan types?
Several types of personal loans exist to help you with virtually any expense. Here are a 🤡few of the most popular loan types:
- Debt consolidation loan: This loan can help you consolidate high-interest credit card debt (and other types of debt, such as auto loans) into one loan with a single monthly payment. Debt consolidation loans can also help you save on interest since personal loans typically have lower interest rates than credit cards.
- Home improvement loan: A home improvement loan is a personal loan for home updates or renovations, like a new roof or a kitchen remodel. This can be helpful if you need a large chunk of money to pay contractors but want to pay the loan off over time.
- Medical loan: A medical loan is designed for out-of-pocket medical expenses, like surgeries and medications. Instead of managing different payments, you can consolidate into one payment, ideally with a lower interest rate.
Secured vs. unsecured personal loans
A secured personal loan is backed by collateral. Collateral is an asset you own, like a house, car, or savings account. If yo𒀰u fail to make your loan payments, the lender can seize your collateral to recoup its losses, which can negatively impact your credit report for up to seven years.
In general, a secured loan is fairꦦly easy to qualify for, regardless of your credit situation, since it’s less of a risk for the lender. However, be cautious about offering up collateral if you’re unsure if you’ll be able to repay the loan.
An unsecured personal loan, on the other hand, doeꦰsn’t require collateral. If you apply for an unsecured loan, the lender will consider factors like your credit score (which will ideally be at least 670) and income to determine your likelihoo🙈d of repaying the loan.
Since unsecured loans are riskier for lenders than secured loans, they’re harder to qualify for and have higher annual percentage rates (APRs). You may have trouble getting an unsec🤡ured loan if you have fair credit or ജbad credit.
Loan options to avoid
While personal loans can be a g꧃reat option when you’re in need of cash, you should avoid the following loan options if at all possible:
- Payday loans: Also known as cash advance loans, payday loans are designed to hold you over until your next payday. While they don’t involve credit checks, their sky-high interest rates — for small loan amounts — make them very expensive. You could face an APR of almost 400%, which can potentially trap you in a cycle of debt if you’re unable to repay the loan.
- Pawnshop loans: Pawnshop loans are secured, short-term loans you can get from a pawnshop. You can borrow anywhere from 25% to 60% of the value of your pawned item, but APRs are typically very high. Plus, the pawnshop will keep your item if you default on the loan.
- Car title loans: Car title loans give you fast cash in exchange for your vehicle’s title. If you take one out, you’ll be on the hook for a high APR. You’ll also risk losing your car if you don’t make your payments.
- 401(k) loans: A 401(k) loan lets you borrow from your retirement account. You pay yourself back with interest, usually over five years. Even if retirement seems far away, you should avoid this type of loan, as it comes with costly penalties and taxes if you’re unable to repay it.
What are the pros of personal loans?
Personal loans✃ have many benefits, including:
- Gives flexibility in purchases: With a personal loan, you can cover an expense without coming up with the cash up front. You may use it for a car repair, medical bill, home improvement, or virtually anything else.
- Can build credit: If you make timely payments on your personal loan, your credit might improve. Good credit can open the door to better rates and terms in the future.
- Low rates: Compared to credit cards and other financing options, personal loans come with lower APRs, especially if you have good credit. A lower APR can save you hundreds or even thousands of dollars.
- High borrowing limits: Lenders often offer personal loans of up to $50,000 or even $100,000.
- Might not require collateral: Unsecured personal loans don’t involve collateral. This means you won’t have to put your house, car, or other asset on the line.
- Many lending options: There are countless lenders that offer personal loans, so you have plenty of options to compare. Online lenders, banks, and credit unions are good places to start.
What are the cons of personal loans?
A personal loan isn’t right for everyone. Here are several drawbacks of 🎉personal loans to keep in mind:
- Need good credit for low rates: To qualify for the lowest rates on personal loans, you’ll need good to excellent credit. If you don’t have a high credit score, you might have to settle for a higher rate.
- May have fees: Some personal loans come with fees in addition to interest. These may include origination fees (the cost of processing your loan), late fees, and prepayment penalties for paying off the loan early.
- Might require collateral: If you choose a secured personal loan, you’ll need to back it with collateral. The lender will seize your collateral if you don’t make your payments.
- Can hurt credit score: Since lenders report payment history to credit bureaus, even one late or missed payment may take a toll on your credit. A lower credit score will likely result in higher rates and less favorable terms in the future. To avoid this possibility, be sure to stay on top of your payments by selecting a loan with a monthly payment you can handle.
- May increase debt: Depending on what you use the funds for, a personal loan can lead to more debt. If you take out a personal loan to go on vacation, for example, you’ll have more debt to repay and another payment to manage.
- May have restrictions: Some lenders restrict what you can do with the loan funds. For example, you might not be able to put them toward education costs or land. Research various lenders to see what their restrictions are so that you select one that allows you to use the funds in the way you need.
Personal loan lender comparison
As you ♌shop around for personal loans, it’s a good idea to compare the following:
- APR: The APR encompasses both the interest rate on your loan and any fees. It’s a percentage of the total amount you’re borrowing. Before you commit to a personal loan, make sure you’re aware of all fees. Some of the most common fees include origination fees, late payment fees, and prepayment penalties. A higher APR will increase the cost of borrowing.
- Repayment term: Lenders offer both short-term and long-term personal loans. In most cases, they range from one to five years, but you may find terms of up to seven years. Look into lenders that have a term that’s long enough for you — and that you can realistically repay.
- Monthly payment: Your monthly payment is the amount you pay each month until you repay your loan completely. It should comfortably fit into your budget.
- Eligibility requirements: While some lenders require good credit, others are more lenient and open to borrowers with lower credit scores. Keep in mind if you do have bad credit, you’ll likely have to settle for a higher interest rate.
- Reputation: Not all personal loan lenders are created equal. Check the reviews on each lender you find so you can make the most informed decision. Specifically, research the availability of their customer service representatives, how past and current customers perceive their lender, and how quickly they provide funds.
Alternatives to personal loans
If you decide a personalꦫ loan isn’t right for you, consider these alternatives:
- Credit card: Credit cards let you make everyday purchases and repay them little by little or all at once. If you pay your balance in full by the end of the month, you can avoid interest charges.
- Personal line of credit: A personal line of credit works a lot like a credit card. But it usually offers a lower interest rate and higher borrowing amount, making it ideal for large one-time expenses. A personal line of credit can also be great on a short-term, as-needed basis (for example, when you want to complete a home renovation).
- Home equity loan: If you’re a homeowner with equity, you may be able to tap into it with a home equity loan. You’ll receive a lump sum of money up front and repay it over a term ranging from five to 30 years. Just note that you can usually only borrow up to 80% of the equity in your home.
- Peer-to-peer loan: A peer-to-peer loan is similar to an unsecured personal loan but is funded by individual investors. Peer-to-peer loans are generally easier to get than traditional personal loans.
- Borrow from friends and family: If you have a friend or family member willing to lend you money, this may be a better route to take. Just make sure you both understand the terms of the loan to avoid putting any strain on your relationship.
Personal loan FAQs
Here are the answers to𒐪 some of the most f𝄹requently asked questions about personal loans.
Can you have a cosigner on personal loans?
If you’re having trouble getting approved for a personal loan, a cosigner can increase your chances of approval with a lower rate. A cosigner can be a friend or family member with good or😼 excellent credit. Some lenders allow cosigners on personal loans, but not all of them do, so it’s a good idea to check with the lender before you apply.
What kinds of fees do personal loans have?
Not all personal loans have fees, but many do. These may i🐎nclude application fees, origination fees, late fees, and prepayment penalties. Consider a lender’s fees before agreeing to a loan.
Can you pay off personal loans early?
Yes, you can repay a personal loan early and save on interest. Just make sure the lender doesn’t charge a prepayment penalty. A prepayment penalty is⛄ a fee that helps the lender recoup its losses from the interest it would’ve earned over the course of your loan term. The penalty can either be a flat fee or a percentage of the loan amount.