Types of Personal Loans: Which One Is Right for You?

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

You can use the funds to pay down high-interest credit card debt, cover emergency home or car repairs, handle medical bills, make home improvements or even finance a vacation or special event.

Here’s what you need to know about the different types of personal loans, how they’re used and what it takes to qualify.

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Quick Take

• Personal loans come in many types — including debt consolidation, credit builder, medical, home improvement, auto repair and small business loans — and each one is designed for a different financial need.

• Secured loans require collateral like a car or home and tend to offer lower rates, while unsecured loans don't require collateral but may come with higher interest rates based on your creditworthiness.

• Compare lenders and check your credit score, debt-to-income (DTI) ratio and income before you apply so you can find the best rate and terms for your situation.

What Are the Main Types of Personal Loans?

The type of personal loan you choose depends on how you plan to use the funds:

How Do Secured vs. Unsecured Personal Loans Differ?

The main difference between a secured and an unsecured loan is collateral. A secured loan is backed by collateral. The collateral can be an asset that may include a car, home, CDs or savings account or other valuables. An unsecured loan is not backed by collateral.

Secured Loan

• You may find lower interest rates with a secured loan.

• Secured loans have higher loan limits.

• If you default on your secured loan, the lender can repossess the collateral, sell it, apply it toward the loan and then sue you for the deficiency amount.

Unsecured Loan

• Unsecured loans don't require collateral.

• 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.

Common Types of Personal Loans

These are the most widely used personal loan options:

Debt Consolidation Loans

This loan allows you to combine multiple high-interest debts into one payment.

• Best for: People with good-to-fair credit who want a lower interest rate

• Choose if: You want fixed payments and a lower rate than your current debt

• Skip if: You’re likely to take on more debt or your credit score is too low to qualify

• Typical costs: 6% to 36% APR, plus origination fees, late or prepayment fees

• Key risks: Fees may reduce savings, and longer terms can increase total costs

• Alternatives: Debt management plan (DMP), balance transfer credit card or home equity line of credit (HELOC)

Credit Builder Loans

A credit builder loan is when money is held in a savings account or CD until you pay off the loan balance.

• Best for: People with no credit or those building credit

• Choose if: You don’t need immediate access to funds or you're building credit

• Skip if: You need cash or qualify for a lower cost option

• Typical costs: 6% to 16% APR plus setup or administration fees

• Key risks: Missed payments can hurt your credit, and funds are not immediately accessible

• Alternatives: Personal loan or secured credit card

Medical Loans

This is a loan for unexpected medical costs like surgery or other procedures.

• Best for: Unexpected medical costs

• Choose if: You need funds quickly and qualify for a lower rate than other options

• Skip if: You qualify for assistance plans, or a 0% interest plan

• Typical costs: 6% to 36% APR plus origination fees

• Key risks: High costs if your credit score is low

• Alternatives: Credit card, provider payment plans or a health savings account (HSA)

Home Improvement Loans

This loan is used to fund home renovations, upgrades or repairs.

• Best for: Manageable projects that don’t require tapping home equity

• Choose if: You don’t want to use your home as collateral

• Skip if: The project is small or you qualify for a lower-rate home equity loan

• Typical costs: 6% to 30% APR plus origination fees

• Key risks: Higher rates than secured loans and potential overborrowing

• Alternatives: Cash savings or HELOC

Wedding or Vacation Loans

This is a personal loan for a specific event.

• Best for: Large purchases that don’t require upfront cash

• Choose if: You want to spread costs over time

• Skip if: You’re taking on long-term debt for short-term fun

• Typical costs: 8% to 36% APR plus origination fees

• Key risks: Carrying debt long after the event

• Alternatives: Credit card or consider a less expensive trip or event

Auto Repair Loans

Auto repair loans let you get funds upfront to take care of an unexpected car repair.

• Best for: Urgent repairs when savings are limited

• Choose if: You rely on your car and qualify for a low APR

• Skip if: The repair cost is manageable without borrowing

• Typical costs: 6% to 36% APR plus origination fees

• Key risks: High interest costs with poor credit

• Alternatives: Credit card

Student Loan Refinancing

A loan used to replace existing student loan debt.

• Best for: Borrowers seeking a lower APR with strong credit and income

• Choose if: You can secure a lower rate than your current loan

• Skip if: You rely on federal loan protections

• Typical costs: 4% to 10% APR

• Key risks: Loss of federal benefits and possible rate increases

• Alternatives: Federal consolidation or extra payments

Small Business Loans

Small business loans differ from personal loans because they’re tailored for business expenses like equipment, inventory and expansion.

• Best for: Entrepreneurs and small business owners

• Choose if: You have a clear plan and stable cash flow

• Skip if: Your business income is unstable

• Typical costs: 6% to 30% APR plus origination fees, underwriting or closing fees

• Key risks: Personal liability for business debt

• Alternatives: Small Business Administration (SBA) loans or business line of credit

How Do You Qualify for a Personal Loan?

Follow these steps to meet common personal loan requirements and improve your chances of qualifying:

1. Find out your credit score: You can pull your credit report from the three credit bureaus. Usually, a lender will prefer a credit score higher than 670.

2. Review your income and DTI ratio: Most lenders like to see stable income and also a DTI lower than 36%.

3. Compare lenders: Do a test run to see which lender offers the best deal.

4. Prequalify and submit your application: You can prequalify and submit your application.

5. Receive approval and funding: Once approved, review your loan terms and accept the offer to receive your funds.

Documents You May Need

• Government-issued ID

• Social Security number

• Proof of income

• Employment information

• Bank account details

Where Can You Get a Personal Loan?

Personal loans are widely available through banks, credit unions and online lenders, with some top banks offering more competitive rates and terms than others.

Banks

• Best for: Those who prefer traditional banking and competitive rates

• Typical rates: 7% to 20%

• Funding speed: 5 to 7 days

Credit Unions

• Best for: Existing credit union members seeking lower rates

• Typical rates: 6% to 18%

• Funding speed: 1 to 5 business days

Online Lenders

• Best for: Borrowers who want fast funding and a digital process

• Typical rates: 6.5% to 36%

• Funding speed: Same day to a few days

Peer-to-Peer (P2P) Platforms

• Best for: Borrowers who may not qualify at traditional banks

• Typical rates: 6% to 36%

• Funding speed: 1 to a few days

How Do You Choose the Right Personal Loan?

Not sure where to start? Use this decision tree to find the right loan for your needs:

• Need to consolidate debt? Consider a debt consolidation loan

• Need cash without collateral? An unsecured loan may work

• Need cash with collateral? Secured loans can help

• Need a small amount of cash quickly? A payday or pawn shop loan may be an option

• Have retirement savings available? A 401(k) loan could be an alternative

• Want a loan with predictable payments? Fixed-rate loans offer consistency

Pros and Cons of Personal Loan Types

Each type of personal loan comes with its own advantages and trade-offs, so it’s important to understand the pros and cons of personal loans before choosing one.

Final Takeaways

• There are unsecured and secured loans. The main difference is that a secured loan requires an asset for collateral.

• You can get a variety of loans — debt consolidation loans, credit builder loans, unsecured or secured loans, vacation loans, etc.

• Lenders will review your credit score, DTI and income to determine how much they can lend and at what interest rate.

• You can get a loan from a bank, an online lender, a credit union or a peer-to-peer lender.

Personal Loan FAQs

Have questions about the different types of personal loans? Here are some of the most commonly asked:

What are the main types of personal loans?

The main types of personal loans are: unsecured, secured, fixed-rate, variable and debt consolidation loans.

What credit score do I need?

You typically need a credit score of 670 or more for a personal loan. You could get a loan with a lower credit score, but your interest rate will be high.

Are secured loans better?

A secured loan is good for the lender since they have recourse if you default on the loan. It’s also good for the borrower since the interest rate is lower and loan limits are higher.

Can I use a personal loan for anything?

Typically, you can use your personal loan for any purpose. However, some lenders prohibit using a personal loan for illegal activities.

How fast can I get approved?

You can get prequalified within minutes, and approval may take one to a few days.

Karen Doyle contributed to the reporting for this article.