There are two main types of personal loans: unsecured personal loans and secured personal loans. Unsecured personal loans do not require collateral, which makes them riskier for lenders, while secured personal loans do require collateral, which makes them easier to get.
Personal loans can also have two types of interest rates, fixed (which can never change) and variable (which change over time). Both unsecured and secured personal loans can have fixed or variable APRs. So that makes four major combinations in all.
Types of Personal Loans
- Unsecured personal loans with fixed APR
- Secured personal loans with fixed APR
- Unsecured personal loans with variable APR
- Secured personal loans with variable APR
Most personal loans can be used for any purpose, but you might see them marketed for specific things like debt consolidation or home improvement. At the end of the day, however, they’re usually just secured or unsecured personal loans with fixed or variable rates.
Below, you can learn more about the various types of personal loans on the market right now and the ways in which they can be used.
Types of Personal Loans Explained
Unsecured Personal Loans
Unsecured personal loans do not require any collateral. The lender’s decision on whether or not to approve an applicant depends largely on the applicant’s credit standing and income. Other factors the lender will consider are the applicant’s current debts, monthly housing payment, recent credit inquiries, past bankruptcies and more. Additionally, unsecured personal loans are riskier for lenders than secured personal loans, which makes them harder for borrowers to get.
Key Things to Know About Unsecured Personal Loans
- Credit score requirement: 600 to 700
- Collateral: None
- Uses: Almost anything
- Typical loan amounts: $1,000 to $100,000
- Typical APR range: 2.5% to 36%
Secured personal loans
Secured personal loans require collateral. This could be money in a savings account or investment account, a vehicle’s title, a piece of property or other valuables. Different lenders will accept different types of collateral. Collateral reduces the lender’s risk significantly because if the borrower defaults on the loan, the lender can keep the collateral.
A secured personal loan is much riskier for the borrower, but it has the benefit of being easier to get than an unsecured loan. Borrowers are also more likely to qualify for lower rates on a secured personal loan.
Key Things to Know About Secured Personal Loans
- Credit score requirement: All credit levels considered
- Collateral: Money in a savings account, a vehicle’s title, a piece of property, etc.
- Uses: Almost anything
- Typical loan amounts: Depends on the value of your collateral
- Typical APR range: Depends on the value of your collateral
Fixed vs. Variable Rates on Personal Loans
Variable APRs are tied to a so-called index rate. Most often, this is the “prime rate,” which is the interest rate at which banks and other financial institutions lend to one another.
Lenders may have a variable interest rate cap. This is a maximum APR past which the borrower’s rate cannot continue to increase, even if the index rate increases further.
Fixed APRs are much more common than variable APRs on personal loans, according to the credit bureau Experian. Fixed rates do not fluctuate with a changing index, so they stay the same for the life of the loan.
Ways to Use a Personal Loan
- Debt consolidation
- Home improvement
- Medical bills
- Emergency cash
- Large purchases
- Starting a small business
- Car maintenance
- Veterinary costs
Those are just some of the many ways people use personal loans. Of course, some of them are more worthwhile than others – medical bills or important home repairs are better things to go into debt for than a dream vacation, for example.
Types of Things You Can’t Use a Personal Loan For
There are a few things you can’t get a personal loan for. The first is obvious – taking out a loan to pay for something that’s illegal such as drugs. You won’t be able to use a loan for gambling, either, which is understandable considering that gambling can severely impact a borrower’s ability to repay the debt.
Lastly, personal loans cannot be used for school tuition. The only type of loan you can use for school tuition is a student loan.