Types Of Personal Loans, Options and How To Qualify

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Personal loans come in many types and may be tailored to different needs like medical expenses, home repairs or debt consolidation.

What Is a Personal Loan?

A personal loan, sometimes called an installment loan, involves borrowing a set amount of money from a bank or other financial institution at a fixed interest rate and paying it back over time with monthly payments.

What You Can Use a Personal Loan For

You can use the money from a personal loan to pay down high-interest credit card debt, fund emergency home or car repairs, pay medical bills, make home improvements or even fund a vacation or special event.

Here’s what you need to know about the different types of personal loans, what each can be used for, and how to qualify.

Loan Type Comparison

The chart below gives an overview of the different types of loans, what they are best for and the credit score typically needed to qualify.

Secured vs. Unsecured Personal Loans

All personal loans can be classified as either secured or unsecured.

Secured Loans

A secured loan is backed by collateral, such as a savings account or other investments. You may find lower interest rates with a secured loan. These loans allow you to keep your assets in the bank, earn interest and leverage other people’s money for purchases or investments.

Some secured loans are designed specifically for people with poor credit or no credit history. These loans, such as a car title loan, can put money in your pocket in an emergency.

Unsecured Loans

Unsecured loans, on the other hand, don’t require collateral. However, they may have higher interest rates, which are based on the borrower’s creditworthiness. If your credit score is 700 or higher, you may qualify for favorable terms on an unsecured loan.

Home Equity Loan

A home equity loan, which is usually used for home repairs or improvements, may be secured by the home itself. It may be referred to as a second mortgage. Be aware that if you don’t make the payments on a secured loan, the lender can seize the collateral — in the case of a home equity loan, your home could be at risk.

Common Types of Personal Loans

There are many types of personal loans available, allowing borrowers to choose the one that meets their needs.

Debt Consolidation Loans

Best for: High-interest credit card debt

• Combine multiple debts into one payment
• Lower overall interest
• Good credit is required for the best terms

Avoid if: You plan to continue using credit cards.

Credit Builder Loans

Best for: Borrowers with poor or no credit

• Can help establish or repair credit
• Requires a deposit equal to the loan amount
• May have fees

Avoid if: Your credit score is good or excellent.

Medical Loans

Best for: Borrowers with medical debt

• Can cover current or expected medical bills
• Payment terms may be more flexible than the provider’s
• Consider fees and the total cost of borrowing

Avoid if: You are able to negotiate with the provider directly.

Home Improvement Loans

Best for: Homeowners who are making repairs or upgrades

• May be secured (as a home equity loan) or unsecured
• Secured loans will have a better interest rate
• Interest may be deductible

Avoid if: You are not certain you can repay, as your home is your collateral if the loan is secured.

Wedding and Vacation Loans

Best for: Paying for a big event

• Good if you have excellent credit and can get a great interest rate
• Keeps you from dipping into savings

Avoid if: You tend to overspend or splurge without planning or budgeting for it.

Auto Repair Loans

Best for: Paying for emergency car repairs

• Good if you have an emergency or scheduled repair you can’t pay cash for
• Keeps you going when an unexpected expense pops up

Avoid if: You may not be able to make the payments and you could lose your car.

Student Loan Refinancing Loans

Best for: Reducing interest on high-interest student loans

• Good if you have excellent credit
• Can reduce interest and consolidate payments

Avoid if: You think you may qualify for forgiveness in the future.

Small Business Loans

Best for: Business owners who need capital to start or expand

• Provides capital without giving up equity
• Can be secured with business equipment for better rates
• Can help build business credit

Avoid if: You’d rather give up equity than have another fixed cost.

Pros and Cons of Different Personal Loans

Use the chart below to compare the pros and cons of the various types of personal loans.

How To Choose the Right Personal Loan

If you’ve decided a personal loan is the best solution to your current financial situation, you’ll want to choose the right one.

1. Remind yourself why you need the loan. As you can tell, different loans exist for different types of expenses.
2. Check your credit score to see what you may qualify for.
3. Check your credit reports, as well, and fix any errors to ensure that you’ll get the best rates and terms possible.
4. Get preapproved. This lets you see how much you’ll qualify for and your likely interest rate, without a hard credit pull, which lowers your credit score.

Once you’ve narrowed down your choices, compare interest rates, repayment terms and fees to find the loan that best fits your needs and budget.

Where To Get a Personal Loan

The places where you can apply for personal loans vary almost as much as the loans themselves. Borrowers with strong credit might get the best rates and terms from a traditional bank.

Credit unions often provide lower interest rates and more flexible terms, but you’ll need to be a member of the credit union to apply. Some credit unions accept nearly everyone, but others require you to be a member of a certain group, or live or work in a specific location.

Online lenders often promise fast approval and convenient online applications but may lack the personalized service of working with a local lender.

Finally, you can seek money through peer-to-peer lenders, which is an alternative to traditional loans. If you’re considering peer-to-peer lending, you’ll still need a high credit score or you could find it difficult to get funding at a reasonable interest rate.

Final Thoughts: Which Personal Loan is Right for You?

Ultimately, your choice of personal loan depends on the loan purpose, interest rates and repayment terms. Before you apply, compare personal loan offers from multiple lenders to find the best fit. Using prequalification tools can help you check rates without impacting your credit score.

Dawn Allcot contributed to the reporting for this article.

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