When it comes to personal loans, there are many products to choose from. Which one is right for you depends on a variety of factors, including your income and expenses, your financial needs and where your credit score currently stands. Find out more about personal loan types below so you can make an educated decision about which ones you might apply for now or in the future.
What Is a Personal Loan?
A personal loan typically refers to an installment loan. Under an installment loan, you borrow money from a lender and agree to pay it back in specific payments over a period of time. Payments might be made weekly, biweekly or monthly, depending on the terms of the loan.
Typically, a personal loan is differentiated from something like a mortgage or car loan. Even though you take out a home or car loan for personal reasons and pay for them personally, they aren’t typically considered to be personal loans.
That’s because mortgage or vehicle loans aren’t flexible. With those types of loans, you apply for money for a specific purpose. The lender only agrees to loan the money for that purpose. In fact, the lender typically doesn’t even give you the money — the amount is usually provided directly to the homeowner or car dealership you’re purchasing from.
With a personal loan, you have more flexibility. You may have and give a reason for applying, but the money ultimately comes to you. You can then decide how best to use the funds.
Unsecured vs. Secured Personal Loans
The two major categories of personal loans are secured and unsecured. Secured personal loans are backed by some form of collateral. These may be less flexible than unsecured personal loans.
While we’re not including car and mortgage loans for the purpose of this article, these are common examples of secured loans. The lender knows that it can take back the home or car to help recoup losses if you don’t make your payments.
But personal loans can also be secured. You might agree to put up a piece of fine jewelry you own or your home theater system as collateral for a personal loan. The lender provides the money for the loan, and you choose what to do with the money. If you miss your payments, however, the lender has a right to demand the items you put up as collateral.
With an unsecured personal loan, there is no collateral. You simply sign that you will pay the loan and the lender takes your word for it. If you don’t pay, the lender has to sue you and get a judgment to garnish your wages or take other collections activities to cover its losses.
Because the lender does take on more potential risk with an unsecured loan, many charge higher rates of interest for these types of loans.
Types of Personal Loans
Whether you’re opting for an unsecured loan or are able to secure a loan with some form of collateral, there are various types of personal loans you might consider. Here are some of the most common personal loans.
What is it? Payday loans are very short-term loans that are secured by your next paycheck. The lender agrees to give you money now based on factors that include how much you make per paycheck. You agree to have the lender take the money out of your account on your next payday.
How to get it? You can get payday loans online or via local offices. You typically need proof of income (such as past pay stubs) and a checking account.
Pros and cons: The biggest benefit of a payday loan is that you can get the money quickly to cover urgent needs. The downside is that traditional payday loans can be expensive, and less-reputable lenders can offer loans that trap people in cycles where they continue to owe for weeks or months. During that time, fees continue to stack up.
Debt Consolidation Loans
What is it? Debt consolidation loans are personal loans specifically for the purpose of paying off other debts. Some lenders pay off the other debts directly, while others provide the money to you with the understanding that you will make arrangements to pay off the debts.
How to get it? You can apply for these types of loans online or in a local office. You usually have to say that the purpose of the loan is debt consolidation. Some lenders have specific financial products for this purpose, while others don’t offer loans for debt consolidation at all. Find out whether debt consolidation is an option with a lender before you begin to apply.
Pros and cons: One of the advantages of a consolidation loan is that you may be able to lower your overall interest rate. You also bring several debts together into one payment, which can make it easier to keep up with. The biggest downside is that you may be tempted to increase your debt. For example, if you pay off revolving debt on credit card accounts, you could be tempted to use those cards again, and that can lead to a situation where you have double the debt you started with. So, debt consolidation loans do require some level of willpower to ensure you get the benefits.
What is it? A pawn loan is one you get from a pawnshop. The pawnshop owner agrees to hold something of value that you own in exchange for lending you money for a short time. If you don’t show up and pay back the loan within that time period, the pawnshop owner can sell the item.
How to get it? To get a pawn loan, you have to bring something of value to the pawnshop. You tell them you want to pawn it, not sell it. The pawnshop owner can then choose whether to offer you a loan.
Pros and cons: A pawn loan can get you cash money in hand that day. However, this is a fairly limited option that requires you to have something the pawnshop owner is interested in. They also are likely to offer you much less than market value on the item because they have to be able to make money if they sell it.
Short-Term Personal Loans
What is it? Short-term personal loans are loans that you take out for a few months to a year or two. You typically pay them back in monthly or biweekly installments, and you can use the funds pretty much as you see fit.
How to get it? To get a short-term personal loan, you apply online or with a local lender. You typically need a checking account to receive the loan funds and potentially to make automatic payments from.
Pros and cons: Short-term personal loans from responsible lenders such as Wise Loan can be a flexible financial tool to help you manage expenses and budgets or cover emergency expenses. They’re also designed so that you are more likely to be able to successfully pay them back, which can help you build your credit. In most cases, the cons of these types of loans tend to be biggest if you’re not making wise financial decisions; otherwise, you can usually enjoy several benefits.