As you begin comparing loans, you’ll find that your credit is often an important factor. It helps determine your approval and loan terms, including interest rate.
To help you get started, we’ll review eight types of loans and their advantages. We’ll also discuss things you should watch out for as you make your decision.
1. Unsecured personal loans
Personal loans are used for a variety of reasons, from paying for wedding expenses to consolidating debt. Personal loans can be unsecured loans, which means you’re not putting collateral like a home or car on the line in case you default on your loan.
Best for debt consolidation and major purchases
If you have high-interest credit card debt, a personal loan may help you pay off that debt sooner. To consolidate your debt with a personal loan, you’d apply for a loan in the amount you owe on your credit cards. Then, if you’re approved for the full amount, you’d use the loan funds to pay your credit cards off, instead making monthly payments on your personal loan.
Depending on your credit, a personal loan may offer a lower interest rate than your credit card — and a lower interest rate could mean big savings.
A personal loan may also be a good choice if you want to finance a major purchase, like a home improvement project, or you have other big costs like medical bills or moving expenses.
2. Secured personal loans
To get a secured personal loan, you’ll have to offer up some type of collateral, like a car or certificate of deposit, to “secure” your loan.
Best for lower interest rates
Secured personal loans often come with lower interest rates than unsecured personal loans. That’s because the lender may consider a secured loan to be less risky — there’s an asset backing up your loan. If you don’t mind pledging collateral and you’re confident you can pay back your loan, a secured loan may help you save money on interest.
Watch out for potential loss of assets
When you use your collateral to take out a loan, you run the risk of losing the property you offered as collateral. For example, if you default on your personal loan payments, your lender could seize your car or savings.
3. Payday loans
Payday loans are short-term, high-cost loans that are typically due by your next payday. States regulate payday lenders differently, which means your available loan amount, loan fees and the time you have to repay may vary based on where you live. And some states ban payday lending altogether.
To repay the loan, you’ll typically need to write a post-dated check or authorize the lender to automatically withdraw the amount you borrowed, plus any interest or fees, from your bank account.
Best for emergency cash when you don’t have other options
Payday loans are usually $500 or less. Getting a payday loan may be helpful if you’re in a pinch and don’t have savings or access to cheaper forms of credit.
Watch out for high fees
Payday loans have high fees that can equate to annual percentage rates, or APRs, of around 400% — much higher than personal loan APRs, which average around 10% to 11% for a 24-month term, according to the Federal Reserve.
4. Title loans
If you own your car, you may be able to take out a car title loan. You can typically borrow between 25% and 50% of your car’s value. Title loan amounts often range from $100 to $5,500, according to the Federal Trade Commission, and you’ll usually have to repay your title loan within 15 to 30 days. If you don’t, your car could be repossessed.
Title loans typically carry high APRs in the triple digits. If you’re approved, you’ll have to hand over your car title until you pay back the full amount of the loan, including fees.
Best for fast cash when you don’t have other options
If you own your car outright and truly don’t have another way to borrow money, a title loan can give you access to cash you might otherwise not be able to get for an emergency.
Watch out for vehicle repossession
If you can’t pay back your loan according to the terms in your agreement, you may continue to rack up fees while your lender continues to hold onto your car title. Eventually, the lender may be able to repossess your vehicle.