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12 Types of Personal Loans: Pros & Cons of Each

12 Types of Personal Loans: Pros & Cons of Each
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated February 22, 2022
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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 12 different types of loans that consumers can take out for personal reasons:
  1. Unsecured Personal Loans
  2. Secured Personal Loans
  3. Fixed-Rate Loans
  4. Variable-Rate Loans
  5. Debt Consolidation Loans
  6. Co-Signed Loans
  7. Personal Lines of Credit
  8. Vacation Loans
  9. Wedding Loans
  10. Revolving Credit
  11. Installment Loans
  12. Payday 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 LoansCons of Unsecured Personal Loans
You do not have to offer any assets as collateral to receive an unsecured personal loanBorrowers 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 conditionsYour 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 matterInterest rates for unsecured personal loans could be higher than interest rates for collateralized loans

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 LoansCons of Secured Personal Loans
Consumers with poor credit may be able to qualify since collateral reduces risk for the lenderYou must own an asset and offer it as collateral
May have lower interest rates than unsecured personal loansThe 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 collateralFinding a secured personal loan can be more difficult than finding unsecured 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 LoansCons of Fixed-Rate Loans
Your interest rate will remain fixed during the life of the loanYour 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 increaseYou could potentially pay more in interest over the life of the loan compared with variable-rate personal loans
You have predictable monthly repayment termsLenders from the outset may charge a higher rate of interest than similar loan products with variable rates

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 LoansCons of Variable-Rate Loans
The interest rate can potentially decrease if underlying benchmark market rates fallThe 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 timeThe 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 loansThe long-term costs could be higher than the total costs of a fixed-rate personal loan

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 LoansCons of Debt Consolidation Loans
Consolidating debt may simplify your debt burden and monthly repayment obligationsThe 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 cardCan 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 timeLenders 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 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 LoansCons of Co-Signed Loans
Cosigners with good credit can help consumers with bad credit get personal loansCosigners 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 interestThe 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 creditThe borrower’s and cosigner’s credit scores could drop if they’re unable to make timely repayments on the loan

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 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 CreditCons 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 repossessionMay require collateral for borrowers with lower credit.
Provides faster access to fundsCan come with high origination fees

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 LoansCons of Vacation Loans
Can help you finance expensive excursionsCan 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 vacationThe 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 journeyCan increase your burden of debt, trigger financial stress, and lead to possible anxiety or depression

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 LoansCons of Wedding Loans
Can help you finance a dream weddingMay 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 cardsRepayments 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 eventCould promote reckless spending on matrimony-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 CreditCons of Revolving Credit
Can help you buy essential items when short on cashRevolving credit products, especially credit cards, may charge high rates of interest on outstanding balances
Can offer flexible repayment optionsHome 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 periodsUsing 100% of your revolving credit can negatively impact your credit score

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 LoansCons of Installment Loans
Can help you finance major purchases or investmentsMay feature high origination fees for getting the loan processed
May feature lower rates of interest than revolving credit productsCan 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 loanMay include prepayment penalties if you pay off the loan early

12. Payday Loans

Payday 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 LoansCons of Payday Loans
Can be easy to apply for and receiveThese bad credit loans may charge excessive fees
Can provide fast cash to consumers with poor credit scores and urgent financial needsCan put borrowers at risk of falling into a cycle of debt
These loans and other cash advance types can satisfy short-term borrowing needsBorrowers who struggle to repay this loan could face an increased risk of bankruptcy

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 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.
Photo credit: iStock/vitapix
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About the Author

Sulaiman Abdur-Rahman

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 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.
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