Different Types of Personal Loans

Personal loan. Calculator, dollar bills and pen.

Anyone can apply for a personal loan to meet their short-term capital needs. The types of personal loan options available to a borrower an unsecured loan, secured loan, fixed and variable rate loan, and a line of credit. Each type is designed to meet the different needs of a borrower.


Unsecured Personal Loans

These loans are for applicants who do not have any assets to give to the lender, so the loan is not protected by any security or collateral. This loan option is for those who want to meet their short-term financial needs such as pay tuition fees, medical bills, utility bills, and/or credit card bills etc. Since there is no security on the loan, the lender is at a greater risk in cases where the borrower defaults in paying back the personal loan and associated interest.

Due to the risk associated with unsecured personal loans, such loans are given to people who have a clean credit history and have little to no defaults in their financial records. The advantages of an unsecured personal loan (if you have a good credit score) are that you can get the loan quickly, and the payments are structured in installments.


Secured Personal Loans

People who are looking for a mortgage loan or an auto loan can apply for a secured personal loan. These loans are available only if the borrower has a verifiable and authenticated security to offer as collateral in return for the loan. When applying for a house or auto loan, the title of the documents is required to be held as security. Financial institutions like banks, investment institutions, and credit unions offer such loans, and since these loans are less risky for lenders, the interest rates are generally much lower when compared to an unsecured personal loan.


Fixed and Variable Rate Loans

Loans that carry the same interest rates on monthly repayments are called fixed rate loans. These are ideal for borrowers if they want to make fixed payments without any fluctuations in the interest rate during the term of repayment.

For variable rate loans, the interest charged on the loan fluctuates and changes as market interest rates change. The change in interest rate is linked to a certain benchmark rate as decided by banks. When there is a fluctuation in the benchmark, the interest rate on the loan changes.


Line of Credit

This form of loan is a small continuing loan where instead of giving a fixed amount to the borrower, the lender approves a credit line for a certain amount and the borrower can use the funds as long as they remain within the credit limit. Similar to a credit card, this form of loan is ideal for those who need to manage ongoing expenses and prefer to pay interest only on the amount used.

If you are uncertain about which type of personal loan to apply for, you should get assistance from a financial advisor who can help you determine the most suitable loan for your situation.