What are the different types of loans?

Anyone considering a loan will discover that there are many different types of personal loans available.

This guide breaks down the different loan types, identifies which types may be less consumer-friendly, and provides the foundation to help you decide which loan fits your situation.

Loans can be categorized at a high level based on several different criteria. Three high-level categories involve the type of underwriting used, the repayment structure, and the type of interest rate on the loan.

The first major category in which you can group loans is related to the type of underwriting criteria used: unsecured loans vs. secured or collateralized loans.

Another way to categorize loans involves the repayment structure. For instance, the loan can be either an installment loan that has a set term and an end date, or a revolving line of credit that can be used over and over.

Loans can also be broken into two different categories based on the type of interest rate: fixed or variable.

Here’s a closer look at these basic loan categories.

Secured loans are backed by a collateral asset that provides “security” to the lender in case the borrower can’t pay back the loan. An example of a secured loan is an auto loan. If you don’t pay the monthly payment for the loan, the car can be repossessed.

Unsecured loans don’t use collateral, which is why they often have specific credit and income requirements.

Installment loans give the borrower a specific amount of time to repay the loan. Repayment typically occurs via fixed monthly payments throughout the term.

Revolving credit lines give borrowers a credit line that they can draw from whenever they wish, as long as there is available credit. Credit cards are an example of revolving credit.

Annual Percentage Rate (APR) is a major factor to consider when comparing loans. Most personal loans have fixed rates, meaning the same APR applies over the full term of the loan. But other loans can have variable rates, in which the APR fluctuates at various points in the term.

In addition to the high-level categories of loans, some loan types are based on what the loan is used for. For example, some personal loans are marketed as debt consolidation loans, medical loans, wedding loans, moving loans, or home improvement loans.

Other types of loans include co-signed and joint loans, which are for people who want to borrow with a co-borrower or who may not qualify on their own.

Additional types of loans may have a nontraditional payback structure, such as buy now, pay later loans or personal lines of credit.

Here are some of the different types of loans:

Unsecured personal loans are most common. Lenders evaluate applicants by looking at several factors, including credit history, income, and ability to repay. From there, the lender determines if the applicant meets their requirements and the loan rate for which they qualify.

Secured personal loans are collateralized, or backed by an asset. This removes some of the risk for the lender and, in some cases, allows borrowers who may not have strong credit to qualify.

Debt consolidation loans are a specific type of personal loan designed to pay off high-interest debt. Some lenders even send payments directly to creditors on your behalf. After old debts are paid, you are left with a single, fixed monthly payment.

Cosigned loans allow someone with strong credit to serve as a backup for a person who has limited or weaker credit. The co-signer agrees to take on the loan payments if the primary borrower can’t meet their obligation, but the funds go to the primary borrower. Joint loans are for co-borrowers, meaning each party shares access to the loan funds as well as the responsibility to pay back the loan.

Personal lines of credit are revolving credit lines. Borrowers can draw funds up to their approved credit limit. There is usually a minimum monthly payment due, but there’s no end date for when the line of credit must be fully repaid. In most cases, you can keep borrowing from the credit line as long as it stays open.

Buy now, pay later (BNPL) is a popular type of short-term loan that splits a purchase into multiple payments. Depending on repayment terms, these types of loans may have no credit check, fees, or interest involved. However, it’s important to review terms because missing a BNPL payment or choosing a longer-term option could lead to additional costs.

When exploring different types of loans, you may find some lending products that aren’t consumer-friendly. These come with high fees, high rates, and strict repayment terms. They may make promises of “fast cash” and are often marketed to people who have poor credit and can’t qualify for traditional personal loans. Some of these products could qualify as predatory lending.

While considering such products, pay special attention to the terms and conditions to make sure you understand how the loan works. Choose a reputable lender that offers transparent terms and clarify anything you don’t understand.

If you need to rely on one of these loans in a pinch, consider establishing a plan for how you’ll repay it so that you don’t end up in a cycle of high-cost debt.

Payday loans are short-term loans (usually for $500 or less) with high fees. They typically offer fast funding, and you repay the lender directly from your next paycheck, either with a post-dated check or via electronic access to your checking account. Payday loans are illegal in some states.

A title loan is a secured loan that uses your vehicle title as collateral. This is often a short-term, high-interest loan. The lender places a lien on your car until you repay the loan, and if you can’t make payments, they can legally repossess your vehicle.

A cash advance is another type of short-term loan that comes with higher costs. A credit card cash advance allows you to draw funds from your credit limit. There’s typically a fee and a separate, higher APR associated with that balance. There are also paycheck cash advance apps that allow you to access your paycheck early, though fees or other charges may apply.

A pawnshop loan is when you use a personal item of value as collateral to borrow cash. The pawnshop determines how much to lend you (usually offering an amount significantly lower than the item’s value). Then, the shop holds on to your item until you repay the loan, plus interest and fees. If you fail to repay, the pawnshop keeps the item.

To choose the right type of loan, figure out how much you need to borrow, the strength of your credit history, and a repayment plan that fits your budget. Ideally, you would borrow exactly the amount you need, have ample time to repay, and do so at the lowest possible additional cost.

Some personal loans are designed for borrowers who need higher amounts and want to pay them back over several years, while others provide smaller amounts to get you through a short-term cash flow challenge. Higher amounts usually mean going for a personal loan or line of credit. Typically consumers who need a few hundred dollars will choose a BNPL pay or some type of cash advance.

Credit status also plays a role in determining which type of loan is best. Stronger credit and steady income will unlock more options and improve your chances of qualifying for a competitive interest rate. People with low or limited credit may consider co-signed loans or secured loans.

The last step is figuring out how much you can reasonably afford to pay back and when. Longer loans may offer a lower monthly payment, but you will pay more in interest over the life of the loan. For smaller loans that require repayment within a few weeks, make sure you can handle paying back that amount in a shorter timeframe.

Understanding the different types of personal loans is the first step in finding the best option for your situation. The next step is choosing a lender. Even among the same loan type, a lender’s offers and terms can vary widely. Once you know your ideal loan type, compare rates and terms to find the best plan for you.