Understanding Different Types of Loans: A Quick Guide

By Janet Schaaf. February 10, 2025 · 9 minute read

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Understanding Different Types of Loans: A Quick Guide

A personal loan is a type of loan offered by many banks, credit unions, and online lenders, and there are an array of options to suit different needs. Personal loans typically don’t place restrictions on how you use the funds, which means they can be a useful source of cash for anything from medical bills to wedding costs to home renovation expenses.

Deciding which kind of personal loan best suits your needs can depend on such factors as how much money you plan to borrow, how soon you plan to pay it back, your creditworthiness and income, and how much debt you already have. To make the best selection, delve into the different types of personal loans available.

Key Points

•   Personal loans offer flexible funding for expenses like medical bills and debt consolidation.

•   Unsecured loans do not require collateral but may have higher interest rates and stricter approval criteria vs. secured loans.

•   Fixed rate loans provide consistent monthly payments, while variable rate loans have fluctuating interest rates.

•   Other types of personal loans can include medical loans and credit builder loans.

•   Key factors to consider when evaluating personal loan options include the interest rate, repayment timeline, and whether collateral is required.

Unsecured Personal Loan

A common type of personal loan is an unsecured personal loan. This means there’s no collateral required to back up the loan, which can make them riskier for lenders. Approval and interest rates for unsecured personal loans are generally based on a person’s income and credit score, but other factors may apply. In terms of how your credit score impacts a loan, you can expect higher credit scores to merit more favorable (or lower) interest rates.

Secured Personal Loan

Unlike an unsecured loan, there is some sort of collateral backing up a secured personal loan. For example, think of it working in the same way a home mortgage does — if the borrower does not make payments, the bank or lender can seize the asset (in this case, the home) that was used to secure the loan.

In terms of accessing this kind of personal loan, collateral could include such assets as:

•  Cash in the bank

•  Real estate

•  Jewelry, art, antiques

•  A car or boat

•  Stocks, bonds, insurance policies

Since secured loans involve collateral, lenders often view them as less risky than their unsecured counterparts. This can mean that secured personal loans might offer a lower interest rate than a comparable unsecured loan.

Here’s a comparison of some of the features of unsecured and secured personal loans:

Unsecured Personal Loan Secured Personal Loan
No collateral needed Requires an asset to be used as collateral
May have higher interest rates than secured personal loans May have lower interest rates than unsecured personal loans
Approval typically based on applicant’s income, credit score, and other factors Approval typically based on value of collateral being used, in addition to applicant’s creditworthiness
Funds may be available in as little as a few days Processing time can be longer due to need for collateral valuation

Recommended: Choosing Between a Secured and Unsecured Personal Loan

Fixed Rate Loan

A personal loan with a fixed interest rate will have the same interest rate for the life of the loan. This means you’ll have the same fixed payment each month and, based on your scheduled payments, can know upfront how much interest you’ll pay over the life of the loan. This can help people budget appropriately as they put funds towards the common uses for personal loans, such as a major dental bill or travel plans.

Variable Rate Loan

 
On the other hand, the interest rate on a variable rate loan may change over the life of the loan, fluctuating based on the prevailing short-term interest rates. Typically, the starting interest rate on a variable rate loan will be lower than on a fixed rate loan, but the interest rate is likely to change as time passes. Variable rate loans are generally tied to well-known indexes.

If you’re trying to decide on a variable- or fixed-rate personal loan, this summary might be helpful (you might also consider crunching the numbers using a personal loan calculator):

 
 

Variable Interest Rate

Fixed Interest Rate

May have lower starting interest rate than a fixed-rate personal loan Interest rate remains the same for the life of the loan
Monthly payment amount may vary during the loan’s term Monthly payment amount will not change
Might be desirable for a short-term loan if current interest rate is low May be a better option if predictable payments are desired for a long-term loan and/or interest rates are rising
Maximum interest rate may be capped Potential to cost more in interest payments over the life of the loan if interest rates drop

Debt Consolidation Loan

This type of personal loan refinances existing debts into one new loan. Ideally, the interest rate on this new debt consolidation loan would be lower than the interest rate on the outstanding debt. This would allow you to spend less in interest over the life of the loan.

With a debt consolidation loan, you may only have to manage one single monthly payment versus, say, paying multiple credit card bills. This streamlining of monthly debt payments can be another major perk of this type of loan.

Cosigned Loan

If you’re struggling to get approved for a personal loan on your own, there are circumstances in which you can apply for a loan with a cosigner. A cosigner is someone who helps you qualify for the loan but does not have ownership over the loan. In the event that you are unable to make payments on the loan, your cosigner would, however, be responsible.

Co-borrowers and co-applicants are other terms you might hear if you’re interested in borrowing a personal loan with the assistance of a friend or family member.

•  A co-borrower essentially takes out the loan with you. Unlike a cosigner, your co-borrower’s name will also be on the loan, so they’d be equally responsible for making sure payments are made on time.

•  A co-applicant is the person applying for a loan with you. When the loan application is approved, the co-applicant becomes the co-borrower.

Recommended: Typical Personal Loan Requirements

Personal Line of Credit

Slightly different from a personal loan, a personal line of credit functions similarly to a credit card. It’s revolving credit, which typically means there is a maximum credit limit, a required monthly minimum payment, and when the debt is paid off, money can be withdrawn again.

The funds in a personal line of credit are generally accessed by writing checks, using a card, or by making transfers into another account.

Interest rates on a personal line of credit may be lower than the interest rates on a credit card. Like personal loans, there are typically both unsecured and secured personal lines of credit available.

Credit Card Cash Advance

Some credit cards offer the option to borrow cash against the card’s total cash advance limit. Doing so is called taking a credit card cash advance. The available cash advance amount may be different than the total available credit for purchases — that information is typically included on each credit card statement.

Depending on the credit card company’s policy, there are a few ways to secure a cash advance: You could use your credit card at an ATM to withdraw money, borrow a cash advance from a credit union or bank, or request a cash advance from the credit card company directly.

Cash advances typically have some of the highest interest rates around, higher still than your regular annual percentage rate (APR). There are often additional credit card fees associated with a cash advance transaction. Check your credit card disclosure terms for full details before taking a cash advance.

Payday Loan

Payday loans are short-term, high-interest loans that are designed to be repaid on the borrower’s next payday. They are often for small amounts of cash and can involve triple-digit interest rates. An example: A $15 finance charge on a loan of $100 that’s due in two weeks has an annual interest rate of 391% if not paid on time. In other words, it can be wise to proceed with extreme caution when accessing cash this way since the amount owed could skyrocket.

Credit Builder Loan

As the name suggests, credit builder loans are a kind of loan that can help a person with no or low credit to positively impact their standing. Unlike most loans which give you funds at the start of the loan, a credit builder loan provides the cash at the end of the loan term. Here’s how they usually work:

•  The lender puts the loan’s money into a separate account, such as a savings account or a certificate of deposit (CD).

•  The borrower makes regular payments to the lender, which over time pays off the loan’s principal plus interest.

•  After the loan has been paid off, the money is released to the borrower.

These payments can be reported to the credit bureaus. If the loan is managed responsibly, this activity can help build the borrower’s credit score.

Medical Loan

A medical loan is usually an unsecured loan that can be applied to medical expenses, such as out-of-pocket costs, copays, hospital bills, and the fees for emergency and elective procedures, among others. You can often find them through banks and online lenders, and they may offer features that make them appropriate for those recovering from health issues, such a period of 0% interest.

The Takeaway

Personal loans can offer a source of cash to be used in a variety of ways. There are various kinds of loans available, such as secured and unsecured, variable and fixed interest rate, and more. Doing research on these different sources of funding can help you make an educated decision about whether a personal loan is right for you and, if so, which type suits your needs best.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.


SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

🛈 SoFi offers a number of different personal loan options. See if one suits your needs.

FAQ

How many types of personal loans are there?

There are many different types of personal loans. Some popular options include secured vs. unsecured (meaning no collateral is needed) loans; fixed vs. variable rate loans; and personal loans designed for specific purposes, such as a debt consolidation, medical, or credit builder loan.

How much is a $20,000 loan for 5 years?

The cost of a $20,000 loan for five years will depend on a variety of factors, such as the interest rate and whether it’s fixed or variable. As an example, a personal loan of $20,000 for 5 years at a fixed rate of 8% would have a monthly payment of $472 for a total repayment of $23,584, meaning you’d pay $3,584 in interest over the life of the loan.

What is the largest personal loan I can get?

How large a personal loan you can get will usually depend on your credit score, income, and debt-to-income (DTI) ratio. Many lenders offer personal loans at up to $40,000–$50,000, but some may approve loans for up to $100,000 if a prospective borrower qualifies.


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