Types of Personal Loans: Pros & Cons of Each

Q: What types of personal loans don’t require collateral?

Unsecured personal loans and lines of credit do not require collateral. You can use this type of funding for just about anything, including wedding expenses, vacations, and home renovations. Because collateral is not required, you’ll most likely need a good credit score and stable income in order to qualify.

Q: What is the average interest rate for personal loans?

As of May 2023, the average interest rate on personal loans is 11.48%, according to the Federal Reserve Bank of St. Louis. Factors that affect the rate you receive include your credit score, debt-to-income ratio, and income.

Q: What are the common credit risks with personal loans?

Credit risks with personal loans include your score dropping temporarily when you apply for the personal loan and your score dropping significantly if you’re unable to repay the loan. If you can’t make your monthly personal loan payments, you’re at risk of being sent to collections. This can damage your credit score and can remain on your credit report for seven years.

Q: Are personal loans revolving or installment loans?

Personal loans can be an installment loan or a revolving line of credit. An installment loan gives you a lump sum of money and is paid back in monthly installments. The interest rate is fixed, so payments are consistent throughout the life of the loan. Revolving lines of credit are similar to a credit card. You can withdraw the funds as you need them, pay them back, and use them again. You only pay interest on what you use, and the rate is usually variable.

12 Types of Personal Loans: Pros & Cons of Each

Sulaiman Abdur-RahmanUpdated September 22, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Personal loans are consumer lending products that provide you with a lump sum of cash to be repaid under terms and conditions of a loan agreement. Here are 11 different types of loans that consumers can take out for personal reasons:

Unsecured Personal Loans
Secured Personal Loans
Fixed-Rate Loans
Variable-Rate Loans
Debt Consolidation Loans
Co-Signed Loans
Personal Lines of Credit
Vacation Loans
Wedding Loans
Revolving Credit
Installment Loans

We describe each of these loan types below and explain their pros and cons.

1. Unsecured Personal Loans

An unsecured personal loan is a financial lending product that provides borrowers with a lump sum of money to be repaid over a specified term without any requirement for the borrower to provide any assets as collateral.

Pros of Unsecured Personal Loans	Cons of Unsecured Personal Loans
You do not have to offer any assets as collateral to receive an unsecured personal loan	Borrowers may need a good credit score of 670 or higher to qualify
You receive your personal loan money in one fell swoop under clear repayment terms and conditions	Your credit score could plunge if you fail to make timely repayments on the unsecured personal loan
You can spend the borrowed money on virtually any personal matter	Interest rates for unsecured personal loans could be higher than interest rates for collateralized loans

When unsecured personal loans are best: Unsecured personal loans are best for those with good credit scores and solid income. They are best used if you need to make a large, one-time purchase and can comfortably afford the monthly payment until the loan is paid off.

2. Secured Personal Loans

Secured personal loans are financial lending products that require borrowers to offer collateral as a condition of receiving a lump sum of money to be repaid over a specified term. Collateral could be any tangible asset you own, such as a vehicle or residential property.The major difference between unsecured vs secured loans is the latter requires collateral as a condition of approval. Secured personal loans have the following pros and cons:

Pros of Secured Personal Loans	Cons of Secured Personal Loans
Consumers with poor credit may be able to qualify since collateral reduces risk for the lender	You must own an asset and offer it as collateral
May have lower interest rates than unsecured personal loans	The lender could seize your collateral if you default or fail to make timely repayments
You may qualify for potentially higher loan amounts by offering up collateral	Finding a secured personal loan can be more difficult than finding unsecured personal loans

When secured personal loans are best: If your credit score is low or your income isn’t steady, a secured personal loan may be in your best interest. Because it’s backed by collateral, you’ll increase your chances of approval and possibly score a better interest rate than you would with an unsecured loan product.Recommended: 10 Possible Benefits of Obtaining Personal Loans

3. Fixed-Rate Loans

Fixed-rate personal loans are financial lending products that provide borrowers with a lump sum of money to be repaid over a period of time under a fixed rate of interest in addition to any outstanding principal payments. The fixed interest rate will never change during the life of the fixed-rate personal loan.

Pros of Fixed-Rate Loans	Cons of Fixed-Rate Loans
Your interest rate will remain fixed during the life of the loan	Your fixed interest rate will never go down, even if market rates go down
You have the peace of mind of knowing your interest rate will never increase	You could potentially pay more in interest over the life of the loan compared with variable-rate personal loans
You have predictable monthly repayment terms	Lenders from the outset may charge a higher rate of interest than similar loan products with variable rates

When fixed-rate loans are best: Fixed-rate personal loans are best for those who want monthly payments that do not change. If you’re living on a fixed income or have a tight budget, a fixed-rate loan gives you the security you need knowing your monthly payment will not change throughout the life of the loan.Recommended: Guide to Getting Employee Loans

4. Variable-Rate Loans

Variable-rate personal loans are financial lending products that provide borrowers with a lump sum of money to be repaid over a period of time under a rate of interest that may change during the life of the loan based upon market conditions.

Pros of Variable-Rate Loans	Cons of Variable-Rate Loans
The interest rate can potentially decrease if underlying benchmark market rates fall	The interest rate can potentially increase during any given month
The starting interest rate is usually lower than a comparable fixed-rate loan opened at the same time	The variable rate promotes uncertainty over whether you’ll be able to afford your monthly repayments each month
Can be more cost-effective than fixed-rate loans	The long-term costs could be higher than the total costs of a fixed-rate personal loan

When variable-rate loans are best: Variable-rate personal loans usually start out with a lower interest rate than fixed-rate loans. These loans are best for those that can pay the loan off quickly, that way they can take advantage of the starting low rate but avoid the rate possibly increasing significantly down the line.

5. Debt Consolidation Loans

Debt consolidation loans are personal loans that allow consumers to borrow a lump sum of money to help pay down other debts. For example, consumers with large credit card balances comprising principal and high levels of accrued interest may consider a debt consolidation loan to simplify their debt burden and monthly repayment obligations.

Pros of Debt Consolidation Loans	Cons of Debt Consolidation Loans
Consolidating debt may simplify your debt burden and monthly repayment obligations	The loan leaves you indebted to a lender, not debt-free
The interest rate on a debt consolidation personal loan could be lower than the interest rate for a credit card	Can feature high fees and high rates of interest compared with other consumer lending products
Eliminating credit card debt through a personal loan and making timely loan repayments each month can help improve your credit score over time	Lenders may conduct a hard inquiry into your credit report before granting your loan, which may cause your credit score to drop several points

When debt consolidation loans are best: If you have high-interest rate credit cards or other forms of high-interest debt, a debt consolidation loan may be in your best interest. These types of loans allow you to consolidate your debt payments into one monthly payment, while hopefully securing a lower rate in the process.

6. Co-Signed Loans

A personal loan with a cosigner is a financial lending product in which an applicant applies for a loan with the assistance of a cosigner who shares the financial responsibility of repaying the loan as a condition of approval.

Pros of Co-Signed Loans	Cons of Co-Signed Loans
Cosigners with good credit can help consumers with bad credit get personal loans	Cosigners are expected to repay the loan if the borrower is unable to make monthly payments
Cosigners can help you qualify for larger loan amounts and lower rates of interest	The cosigner’s debt-to-income ratio can increase and make it harder for cosigners to qualify for new credit
Receiving a personal loan with the help of a cosigner can help you build credit	The borrower’s and cosigner’s credit scores could drop if they’re unable to make timely repayments on the loan

When co-signed loans are best: Co-signed personal loans are best for those with less-than-ideal credit scores who need to secure financing. Having a cosigner can help you score a better interest rate, and by making on-time payments, you can work to build your credit score.

7. Personal Lines of Credit

A personal line of credit is a revolving lending product that may allow you to borrow a certain amount of funds for personal spending purposes. Personal lines of credit give borrowers versatile financing comparable to traditional personal loans but are constrained by a defined monetary limit on how much funds the borrower can access and spend.

Pros of Personal Lines of Credit	Cons of Personal Lines of Credit
Offer flexible borrowing amounts, especially for smaller loans	Unsecured personal loans typically have higher interest rates
No risk of home repossession	May require collateral for borrowers with lower credit
Provides faster access to funds	Can come with high origination fees

When personal lines of credit are best: Personal lines of credit are best for those that want flexibility with their financial products. A line of credit allows borrowers to withdraw funds as they please, pay them back, and use them again. This type of financing is best for those who want total control and flexibility of their funds.

8. Vacation Loans

Vacation loans are personal loans permitting the borrower to spend the money on anything related to a vacation. Borrowers can obtain unsecured vacation loans to finance a major getaway.Vacation loans provide the borrower with a lump sum of money to be repaid over a period of time under the terms and conditions of a loan agreement.

Pros of Vacation Loans	Cons of Vacation Loans
Can help you finance expensive excursions	Can negatively impact your debt-to-income ratio and make it harder to qualify for additional consumer lending products during the life of the loan
May include lower rates of interest compared with using credit cards to finance a vacation	The costs of repaying the loan can be high in terms of principal and interest
Can cover any expenses related to a dream vacation or sightseeing journey	Can increase your burden of debt, trigger financial stress, and lead to possible anxiety or depression

When vacation loans are best: Vacation loans are ideal for those that want to fund a vacation and get a low interest rate on their loan. Vacationers can also consider rewards credit cards, but keep in mind that interest rates on credit cards are usually much higher than they are with personal loans. If you can’t pay your credit card balance off each cycle, a personal loan for vacations may be better suited for you.Recommended: Personal Loans for Moving in 2024

9. Wedding Loans

Wedding loans are personal loans that may allow borrowers to finance any expenses related to a nuptial ceremony. Such expenses may include engagement rings, wedding bands, catering, photography, and honeymoons.

Pros of Wedding Loans	Cons of Wedding Loans
Can help you finance a dream wedding	May increase your debt-to-income ratio and make it harder for you to qualify for additional consumer lending products during the life of the loan
May carry lower rates of interest compared with credit cards	Repayments can be costly in terms of principal and interest
Can help you pay any vendors who may demand cash-only transactions for their goods or services at your special event	Could promote reckless spending on matrimony-related expenses

When wedding loans are best: The average wedding cost is $34,000, and unless you have money saved or someone helping to pay for the event, your only option may be to take out a personal loan for weddings. Wedding loans are best for those who want or need help to pay for items such as the venue, catering services, the honeymoon, or any other wedding-related expenses.

10. Revolving Credit

Revolving credit is any consumer lending product that allows you to borrow money or make purchases through accessible credit that is restricted by a borrowing or spending limit. Revolving credit includes credit cards, personal lines of credit, and home equity lines of credit, and revolving credit replenishes automatically whenever you make repayments on the account.

Pros of Revolving Credit	Cons of Revolving Credit
Can help you buy essential items when short on cash	Revolving credit products, especially credit cards, may charge high rates of interest on outstanding balances
Can offer flexible repayment options	Home equity lines of credit, or HELOC revolving credit products, can reduce the amount of equity in your home
May feature interest-free promotions or grace periods	Using 100% of your revolving credit can negatively impact your credit score

When revolving credit is best: Revolving lines of credit are best for those who want access to cash, but may not need a large sum all at once. Revolving credit, such as a personal line of credit, allows you to withdraw the money as you please, pay it back, and use it again when needed. This type of funding is one of the most flexible products to choose from.Recommended: Personal Line of Credit vs HELOC

11. Installment Loans

An installment loan is a lump sum of borrowed money that consumers may repay over time with a fixed number of scheduled payments.Installment loans can include personal loans, student loans, auto loans, mortgages, and home improvement loans.

Pros of Installment Loans	Cons of Installment Loans
Can help you finance major purchases or investments	May feature high origination fees for getting the loan processed
May feature lower rates of interest than revolving credit products	Can raise your debt-to-income ratio and make it harder for you to qualify for additional consumer lending products during the life of the loan
Can help you build credit if you make timely repayments over the life of the loan	May include prepayment penalties if you pay off the loan early

When installment loans are best: Installment loans are best for those who need to borrow a large sum of money and want consistent payments attached to their loan. Installment loans typically come with fixed interest rates, allowing you to be confident in the fact that your monthly payment will not change throughout the life of the loan.Recommended: Guide to $50k Personal Loans

Types of Loans to Avoid

Unless you are truly in a pinch, it is best to avoid the following types of loans:

Payday Loans

Payday loans should only be used as a last resort, if at all. It’s too easy to start depending on these loans and end up trapped in a cycle of debt. Payday loans are short-term loans with high fees. They are typically in amounts of no more than $500 and are due by your next pay period.To get a payday loan, you typically only need a form of ID, a bank account, and proof of income. If approved, you can receive the funds instantly. The problem with payday loans is once you pay the loan back with your paycheck, you’re left needing funds once again before your next pay period. This is what payday lenders rely on, and unfortunately it is not beneficial to the borrower to fall into this type of predatory lending.

Cash Advance Apps

Cash advance apps work similarly to payday loans in that they lend small amounts of money with high fees to borrowers in need of quick cash. Payments are due the next pay period, as well.Approval for cash advances can be instant or up to a few days. Funding times are typically quick, usually within a few hours of loan approval. Keep in mind, though, that cash advances should only be used in an emergency situation or else it’s too easy to become trapped in the cycle of debt.

Pawnshop Loans

Pawnshop loans are short-term loans that are secured by collateral. These loans are less risky than payday loans, as you bring the collateral with you to the pawn shop in exchange for cash. If you can’t repay the loan, the pawnshop lists your item for sale and collects the proceeds. You aren’t at risk of being sent to collections or lowering your credit score with a pawnshop loan.If you need cash immediately and have an item of value that you possibly don’t mind losing, a pawnshop loan may be worth looking into. However, the average pawnshop loan is just $150, so if you’re in need of more, a personal loan may be your best bet.

Credit Card Advance

A credit card advance allows you to take cash out from your credit card. While this may seem like an easy way to get money you need, it’s an extremely expensive form of borrowing.The money you withdraw is added to your credit card balance, in addition to a fee that is charged to your account by the credit card issuer. Interest rates for credit card advances are typically higher than if you were to just use your credit card for a purchase, so keep that in mind before opting for this type of loan.

Title Loans

A title loan uses your car as collateral to secure short-term financing. Because your car is used as collateral, a credit check isn’t necessary for title loans.To qualify, you do need to own your vehicle and not have any liens on your title. In exchange for the loan, you’ll give the lender the title to your car. Most title loans are due within one month, and if you can’t afford to pay it back, the lender keeps your car.Unless you are certain you will be able to repay the loan, title loans — along with payday loans, cash advance apps, pawnshop loans, and credit card advances — should be avoided.

The Takeaway

Lenders may disburse personal loans for a wide range of consumer needs. From weddings and vacations to debt consolidation and financing for unplanned expenses, borrowers may use personal loans for almost any personal expense.Lantern by SoFi can help you find and compare personal loan options today. Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process to apply for a personal loan with the lender of your choice.

Frequently Asked Questions

What types of personal loans don’t require collateral?

What is the average interest rate for personal loans?

What are the common credit risks with personal loans?

Are personal loans revolving or installment loans?

Photo credit: iStock/vitapix

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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.

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