By Janet Schaaf – 6 minute read
Even with the strictest budgeting and savviest spending, there may come a time when you face an expense that you just can’t cover with cash. It might be tempting to put the expense on a credit card. While that can be one solution, there are other options.
A personal loan is a type of loan that is offered by many banks, credit unions, and online lenders like SoFi. Unlike a mortgage loan or car loan which specifies what the money should be spent on, a personal loan doesn’t have as many restrictions and can typically be used to pay for a variety of expenses.
A variety of factors will influence which type of personal loan is right for you, like how much money you plan to borrow, your credit and income, and how much debt you already have. Read on for a few different types of personal loans explained.
Unsecured or Secured
A common type of personal loan is an unsecured personal loan. This means that there is no collateral backing up the loan. This 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.
Unlike an unsecured loan, there is some sort of collateral backing up a secured personal loan. For example, think of a home mortgage: if the borrower does not make payments, the bank or lender can seize the asset — the home — used to secure the loan as collateral.
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|
|Higher interest rates compared to secured personal loan||May have lower interest rate than unsecured personal loan|
|Approval based on applicant’s income, credit score, and other factors||Approval 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|
Variable or Fixed Interest Rate
A personal loan with a fixed interest rate will have the same interest rate for the life of the loan. This also means you’ll have the same fixed monthly payment and, based on scheduled payments, know upfront how much interest you’ll pay over the life of the loan.
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, such as the 1-month LIBOR .
If you’re trying to decide on a variable or fixed-rate personal loan, this summary might be helpful:
|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|
|Payment amount may vary from month to month||Monthly payment will not change|
|Might be desirable for a short-term loan if current interest rate is low||If predictable payments are desired, a long-term loan with a fixed rate might be the way to go|
|Maximum interest rate may be capped||Potential to cost more in interest payments over the life of the loan|
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 is lower than the interest rate on credit card debt, which may mean you spend less money in interest over the life of the loan. With a debt consolidation loan, you may only have to manage one single monthly payment.
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 be responsible.
Coborrowers 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 coborrower essentially takes out the loan with you.
Your coborrower’s name will also be on the loan so they’ll 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 coborrower.
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 or using a card, or 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 both unsecured and secured personal lines of credit.
Credit Card Cash Advances
Some credit cards offer the option to borrow cash against the total cash advance limit. This is called a credit card cash advance. The available cash advance amount may be different than the total available credit for purchases — the information is typically included on each credit card statement. Depending on the credit card company’s policy, there are a few options to secure a cash advance: you can 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 rates around. There are often additional credit card fees associated with a cash advance transaction. Check your credit card disclosure terms for full details before making a cash advance.
Different Types of Personal Loan Uses
Personal loans can be used for nearly any personal expense. Here are a few reasons people consider borrowing money with a personal loan.
Planning a Wedding
The dress, flowers, catering, photographer, venue fees — the list of wedding expenses can go on and on. While Covid-19 put a halt on many weddings and, therefore, wedding spending, wedding experts expect that celebrations, along with spending, will resume as long as it’s safe to do so. A personal loan for weddings is one option that can be used to cover all or part of costs.
Whether you’re moving across the country or just across town or, the cost of moving can add up quickly. A personal loan could potentially help you make ends meet as you’re relocating.
If you want to do a few renovations or upgrades on your new place, a personal loan could help with that too.
Another reason people use personal loans is to consolidate debt. Debt consolidation could allow you to simplify your repayment since you may only have one single payment to keep track of every month.
Depending on the rate and terms you qualify for, consolidating your debt could potentially help you save money on interest payments while you pay down your debt.
Taking a Vacation
Planning a vacation? Maybe your niece is getting married in Greece or you and your partner are planning a honeymoon. If budgeting and saving aren’t enough to get you to your vacation goal, a vacation loan could be one option to help you fill in the gaps.
Making a Large Purchase
Whether it’s a new TV, new patio furniture, or an engagement ring, if the cost of your dream item is a little out of your budget, a personal loan could help you afford the option you really want.
Armed with some knowledge about types of personal loans, you may be ready to make an educated decision about whether or not a personal loan is right for you. As you consider your options, take a look at SoFi.
There are absolutely no fees when you borrow a personal loan with SoFi and as a SoFi member, you’ll be eligible for additional benefits like career coaching.