7 Types of Personal Loans
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Personal loans are just one way to get cash when you want to consolidate or refinance debt or pay for a major purchase, emergency expense or another cost. Generally, they have fixed interest rates and are paid back in installments over 12 to 60 months or longer, but they can also come with variable interest rates. Similarly, though personal loans are often unsecured, meaning they don’t require collateral for qualification, you can find secured personal loans, as well.
Here’s a look at the major features of personal loans, as well as the different types of personal loans.
7 types of personal loans
Personal loans can be used for a variety of expenses, and they can go by various names. Though many of them work similarly, lenders may give them specific, purpose-driven titles and offer varying terms depending on each purpose. For example, LightStream currently offers wedding loans with APRs (annual percentage rates) starting 5.95%* APR, while APRs for home improvement loans start at 3.99%.
Here are some of the most popular types of personal loans and what you need to know about each.
|Common types of personal loans|
|Credit builder loan||A secured loan that helps you to build a healthy credit history|
|Debt consolidation loan||Combine multiple debts together, ideally with a lower interest rate|
|Holiday loan||Can help cover the cost of gifts and other holiday expenses|
|Home improvement loan||Used to pay for home improvement projects and repairs|
|Medical loan||Can cover the cost for medical treatment or living costs while you’re recuperating from an illness or procedure|
|Vacation loan||Allows you to cover the cost for a vacation|
|Wedding loan||Helps you pay for your big day and related expenses|
1. Credit builder loan
A credit builder loan is intended to help you do just that — build your credit. Whether you’re trying to establish a credit history or repair one that has been less-than-stellar, a credit builder loan gives you the opportunity to show lenders that you are a responsible borrower by making timely payments on the loan.
Once approved, the amount of the loan is placed in a savings account, which is held by the bank and is not at your disposal. You make monthly payments on that amount, and once you’ve paid it all back, then you receive the funds along with interest or dividends in some cases.
As long as you make all your payments on time and in full, you’ll likely get a boost to your credit score. Most credit builder loans are small — from $300 to $1,000 — and range from six to 24 months. They’re typically much easier to get than other personal loans as there’s little risk to the financial institution in granting you one. Note, however, that in some cases you’ll be charged an administration fee for such loans.
2. Debt consolidation loan
Debt consolidation loans allow you to roll multiple debts into one with a new interest rate and repayment term. The key perks to a debt consolidation can include:
- Repaying your debt with a lower interest rate
- Shortening or extending the amount of time you’re in debt
- Getting a fixed interest rate when you may have had a variable rate
- Reducing the number of debt payments you make each month
In most cases, when you’re approved for a debt consolidation loan, the lender will deposit funds into your bank account. You’ll then use that money to pay off your old debts (though in some cases, the lender will pay off your creditors directly). Depending on the lender, you could borrow from $2,000 to $35,000 or more.
Depending on your credit and the type of debt you’re carrying, debt consolidation loans can help you repay your debt at a lower rate. When comparing your loan options, pay attention to loan APRs, or annual percentage rates. This rate represents the interest rate plus fees, and is a more accurate representation of your cost of borrowing.
The lowest rates are offered to borrowers with excellent credit and finances. These borrowers may also consider a balance transfer credit card as a potentially more affordable way to consolidate or refinance credit card debt. If you have bad credit, however, a debt consolidation loan may not be a viable way to save money over repayment, unless you have debt with exceptionally high rates like payday loans.
3. Holiday loan
Holidays are typically joyful times, but they can also be expensive. There are gifts to buy, festivities to attend and a host of other holiday happenings that can add up and create stress.
Sixty-one percent of Americans reported they were dreading the December holidays because of the associated costs, according to a 2019 LendingTree survey. For gifts alone, a typical consumer expected to spend $602.65, and that number jumped to $850.38 if they had children under 18. On top of that, there’s often the cost of travel, parties, decorations and more that people rack up in the name of happy holidays. To help ease some of that stress and cover holidays costs, some consumers turn to holiday loans.
Ideally, you should save up for these expenses ahead of time, but when that’s not possible or you don’t want to dip into savings, holiday loans could bridge the gap. As with any loan, though, you want to make sure you don’t borrow more than you can repay. Unfortunately, far too many people do — one in five survey respondents were still paying off debt from the 2018 holiday season.
4. Home improvement loan
For most people, your home is your largest asset, so you want to keep it in good working order and as updated as possible to protect your return on investment. Home improvements and repairs can be pricey though, which is why some homeowners seek out home improvement loans.
Take a new roof, for example. While prices vary widely based on the size of your home, type of roof and where you live, the national average rings in at $6,626, according to HomeAdvisor, a marketplace for home improvement and maintenance services — but not everyone has that kind of cash sitting around.
Your typical home improvement loan is unsecured and, as long as you have good credit, can be easy to get. However, if you’re more comfortable with a secured loan, or want to minimize interest charges, a home equity loan could be a more affordable option.
5. Medical loan
Medical expenses can quickly add up, and if you’re unable to pay, you may consider a medical loan to cover them or to take care of living expenses while you recover.
A word of caution about medical loans, however: In many cases, medical providers will provide payment plans with more attractive terms than medical loans, such as no-interest plans. They also may be willing to negotiate when it comes to price. In any case, it’s a good idea to do some investigating before you take out a medical loan to make sure it’s the best option possible (plus, you should also note that you may also have to pay an origination fee for a medical loan).
6. Vacation loan
A vacation loan, otherwise known as a personal loan may be just what you need to help you escape the daily grind and get away, while putting off paying for it until another day. But while the memories you make may be priceless, repaying a vacation with interest can be pricey, depending on your loan terms. In general, it’s wiser to save ahead for vacation costs.
You might choose a vacation loan, however, if you’d prefer to hold onto savings for emergency costs or if you’re attending a special event like a wedding on short notice.
7. Wedding loan
The national average wedding cost is $33,900, according to a 2019 report by wedding planning website The Knot. For couples who are unable to pay for wedding costs out of pocket, a wedding loan can be one financing option. Similarly, you can also find honeymoon loans.
One downside to a wedding loan, however, is the fact that personal loans are for fixed amounts. If you borrow too little, for example, you’ll have to take out another loan or charge a credit card to cover additional costs. For that reason, a personal line of credit or credit card could be a more practical financing option, as you can borrow on a rolling basis.
Key features of personal loans
Unsecured vs. secured
When it comes to the different kinds of personal loans, they all fall into one of two categories: unsecured and secured. An unsecured loan doesn’t require collateral in order for you to be eligible. A secured loan does require collateral, such as your car or a savings account, and its value could affect how much you’re eligible to borrow.
Unsecured loans are harder to obtain and interest rates can be higher, as lenders rely heavily on your credit and other financial information to determine your loan eligibility. The better your credit score, the better the interest rate you’re likely to get. In general, a score in the high 600s or higher is most desirable. If you have poor credit, you’ll likely have a tougher time getting an unsecured loan with a reasonable interest rate, if you qualify at all.
Secured loans, on the other hand, could be easier to get, since your collateral lessens the risk for lenders. They also typically come with more favorable terms than unsecured loans. The downside to secured loans, however, is that if you’re not able to pay the funds back, you risk losing the personal property you put up as collateral.
Fixed vs. variable rate
Whether your loan is unsecured or secured, there’s the matter of interest, which is your primary cost to borrow the money. A fixed interest rate means the rate remains the same for the life of the loan. In contrast, a variable interest rate means the rate will change over the life of the loan in response to the ups and downs of a financial benchmark determined by the bank — typically the London Interbank Offered Rate (LIBOR) or the Prime Rate.
Most personal loans come with fixed interest rates, but the rate you receive for either will be based on your credit score. Again, the higher your credit score and stronger your finances, the lower the interest rate you can expect.
Fixed interest rates allow you to know just how much the loan will cost you in its entirety and allow you to budget accordingly. Variable interest rate loans may save you money if interest rates go down, but if they go up, they could end up costing you more. While they do have ceilings to protect borrowers from astronomical jumps in the market, those ceilings are generally set quite high.
*APR accurate as of June 16, 2020