There are two main types of personal loans: unsecured and secured. Secured personal loans require collateral, while unsecured personal loans do not. 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.
Based on the way that banks, credit unions and online lenders market their offers, it would be fair to assume that lots of different types of personal loans are available. But debt consolidation loans, medical loans, home improvement loans and wedding loans are all just examples of personal loans with a special name attached. In fact, some lenders have up to 10 or more versions of the same personal loan offer.
With that being said, most personal loans can be used for any purpose. So the types of things a personal loan can do are limitless. 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.
Major Types of Personal Loans
All personal loans fit into one of two categories, unsecured or secured. That’s true of personal loans from banks, credit unions and online lenders – even those from friends and family. And the difference between the two has a big impact on how easy the loans are to get as well as their potential APRs.
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.
Because unsecured personal loans lack collateral, lenders have a harder time recouping their money if a borrower is unable to pay the loan back. Unsecured personal loans are riskier for lenders as a result, which makes them harder for borrowers to get. Typically, an unsecured personal loan will require a credit score of at least 660. There are some unsecured personal loans for people with below-average credit, but they are more likely to charge high minimum APRs.
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.
This type of personal loan is much riskier for the borrower, but it also has the benefit of being easier to get. Even people with bad credit (scores below 640) stand a decent chance of qualifying for a secured personal loan. Borrowers are also more likely to qualify for lower rates on a secured personal loan. That can make these loans appealing to people with higher scores who are confident they can make all their monthly payments and thereby keep their collateral.
Fixed vs. Variable Rate Personal Loans
All personal loans have one of two types of APRs: fixed or variable. A fixed APR will not change for the life of the loan. In contrast, a variable APR can go up or down, depending on the market.
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. However, variable-rate personal loans typically have lower starting APRs than fixed-rate personal loans, according to SoFi (a major personal loan provider).
Types of Things You Can Use a Personal Loan For
Most personal loans can be used for just about any expense, except for a college education – that’s what student loans are for. However, lenders have the right to restrict what their loans can be used for. And occasionally, a lender may offer separate APR ranges for multiple types of personal loans, intended for different purposes (a debt consolidation loan, a wedding loan, a medical loan, etc.).
Personal Loan Categories:
- Debt consolidation (other loans, credit cards and more)
- Starting a small business
- Home improvement
- Car purchases (though auto loans are usually better)
- Car maintenance
- Medical bills
- Veterinary costs
- Large purchases
- Emergency cash
Those are just some of the many types of personal loans people get. Of course, some of them are more worthwhile than others – paying for medical bills or doing home repairs are better things to go into debt for than a dream vacation, for example.
There are also a few types of situations for which you simply can’t get a personal loan. 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.