A personal loan is money you borrow from a lender and repay in monthly installments. You repay the loan with interest over a specified period, usually between one to five years.
You can use a personal loan for many reasons, including home improvements, medical expenses, and debt consolidation.
Let’s take a closer look at the most common personal loan types so you understand which one is best for you.
Several types of personal loans exist to help you with virtually any expense. Here are a few of the most popular loan types:
Related: Learn more about getting a personal loan on Credible.com
A secured personal loan is backed by collateral. Collateral is an asset you own, like a house, car, or savings account. If you fail to make your loan payments, the lender can seize your collateral to recoup its losses, which can negatively impact your credit report for up to seven years.
In general, a secured loan is fairly easy to qualify for, regardless of your credit situation, since it’s less of a risk for the lender. However, be cautious about offering up collateral if you’re unsure if you’ll be able to repay the loan.
An unsecured personal loan, on the other hand, doesn’t require collateral. If you apply for an unsecured loan, the lender will consider factors like your credit score (which will ideally be at least 670) and income to determine your likelihood of repaying the loan.
Since unsecured loans are riskier for lenders than secured loans, they’re harder to qualify for and have higher annual percentage rates (APRs). You may have trouble getting an unsecured loan if you have fair credit or bad credit.
While personal loans can be a great option when you’re in need of cash, you should avoid the following loan options if at all possible:
Personal loans have many benefits, including:
A personal loan isn’t right for everyone. Here are several drawbacks of personal loans to keep in mind:
As you shop around for personal loans, it’s a good idea to compare the following:
Related: Learn more about getting a personal loan on Credible.com
If you decide a personal loan isn’t right for you, consider these alternatives:
Here are the answers to some of the most frequently asked questions about personal loans.
If you’re having trouble getting approved for a personal loan, a cosigner can increase your chances of approval with a lower rate. A cosigner can be a friend or family member with good or excellent credit. Some lenders allow cosigners on personal loans, but not all of them do, so it’s a good idea to check with the lender before you apply.
Not all personal loans have fees, but many do. These may include application fees, origination fees, late fees, and prepayment penalties. Consider a lender’s fees before agreeing to a loan.
Yes, you can repay a personal loan early and save on interest. Just make sure the lender doesn’t charge a prepayment penalty. A prepayment penalty is a fee that helps the lender recoup its losses from the interest it would’ve earned over the course of your loan term. The penalty can either be a flat fee or a percentage of the loan amount.
Related: Learn more about getting a personal loan on Credible.com