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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 12 different types of loans that consumers can take out for personal reasons:
We describe each of these loan types below and explain their pros and cons.
- 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
- Payday Loans
1. Unsecured Personal LoansAn 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|
2. Secured Personal LoansSecured 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|
3. Fixed-Rate LoansFixed-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.
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|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|
4. Variable-Rate LoansVariable-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|
5. Debt Consolidation LoansDebt 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|
6. Co-Signed LoansA 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|
7. Personal Lines of CreditA 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 a traditional personal loan 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|
8. Vacation LoansVacation 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|
9. Wedding LoansWedding 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|
10. Revolving CreditRevolving 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|
11. Installment LoansAn 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|
12. Payday LoansPayday loans are quick personal loans that can provide consumers with small sums of cash on short notice. Borrowers are typically expected to repay these loans in a matter of weeks or months, and payday loans may feature high fees ranging from $10 to $30 for every $100 borrowed.
|Pros of Payday Loans||Cons of Payday Loans|
|Can be easy to apply for and receive||These bad credit loans may charge excessive fees|
|Can provide fast cash to consumers with poor credit scores and urgent financial needs||Can put borrowers at risk of falling into a cycle of debt|
|These loans and other cash advance types can satisfy short-term borrowing needs||Borrowers who struggle to repay this loan could face an increased risk of bankruptcy|
The TakeawayLenders 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 purpose.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.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS # 1121636, a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.
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About the Author
Sulaiman Abdur-RahmanSulaiman 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 currently serves 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.