The difference between personal loans and other common loan types like mortgages and auto loans is a personal loan’s purpose is not strictly defined. Instead, this type of loan is a general purpose loan that can be used for any purpose the borrower sees fit. When searching for this type of loan, borrowers need to be aware that there are many different types of personal loans. Choosing the right personal loan depends on many factors, including existing collateral, fees, interest rates, loan terms and more. It’s important to examine all aspects of your personal situation and the characteristics of the different loan types in order to choose the loan that’s right for you. Comparison sites make it easy to find the right loan for you.

Secured or unsecured?

The first characteristic of any loan is whether it’s secured or unsecured. A secured loan is backed by financial assets, called collateral. This could be a home or any other major piece of property. Your ability to repay is guaranteed against this asset, which can be repossessed by the lender in the event of loan default. An unsecured loan is the opposite. There is no collateral. Secured loans are better for a borrower’s credit rating and typically have fewer associated fees and lower interest rates than unsecured loans. After considering your own collateral situation and deciding whether your personal loan will be secured or unsecured, it’s time to assess the pros and cons of various loan types.

Home Equity Loan

With this type of loan, the borrower uses the equity in the home – the amount of the home actually “owned” by paying mortgage – to open a line of credit.

PROS: lower interest rates and payments
CONS: longer pay-back time, possibility of foreclosure

Line of Credit with Home Equity Loan

This type of home equity loan opens a line of credit against the equity. This is good if you don’t need all the funds at once.

PROS: can only borrow what you need instead of big lump sum, payments are interest-only
CONS: again, risk of foreclosure

Low-Credit or Low-Documentation Loans

These loans are designed for borrowers with a poor credit history or a lack of proper credit documentation, including adequate tax and payroll records.

PRO: might be the only option for needy borrowers in a tough situation
CON: high interest rate, fees and other undesirable terms

Short-Term Loan

This type of personal loan features a shorter repayment schedule. They can be secured or unsecured.

PRO: good for when smaller amounts of cash are needed quickly
CONS: higher interest rate due to short payment term, small amounts available for borrowing

Payday Cash Advance Loans

These are high-interest loans for emergency funds where the borrower agrees to repay the amount in full, plus fees, when they receive their next paycheck.

PROS: handy in case of unexpected events or emergencies, easy qualification
CONS: high rates, exorbitant fees