In a NutshellIf you want to borrow money, there are a number of different loans to consider. But what’s best for your circumstances and needs? First, think about what you need the money for. Then compare interest rates, loan amounts and terms before deciding what type of loan is best for you.
All loans aren’t created equal. If you need to borrow money, first, you’ll want to decide which type of loan is right for your situation.
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.
- Unsecured personal loans
- Secured personal loans
- Payday loans
- Title loans
- Pawn shop loans
- Payday alternative loans
- Home equity loans
- Credit card cash advances
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. It may help to get an idea of what the average debt consolidation rate is.
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.Should you take out a loan to pay off credit card debt?
Watch out for credit requirements and interest rates
Since unsecured personal loans don’t require collateral, lenders usually turn to your credit reports and credit scores to help determine if you’re a good candidate for a loan. In general, people with higher credit scores will be eligible for better loan terms.
You may be eligible for an unsecured personal loan even if you have fair or bad credit. But you may want to shop around to make sure the interest rate and monthly payment is affordable for your budget.
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.
5. Pawn shop loans
A pawn shop loan is another fast-cash borrowing option. You’ll take an item of value, like a piece of jewelry or an electronic, into a pawn shop and borrow money based on the item’s value.
Loan terms vary based on the pawn shop, and interest rates can be high. But some states have stepped in to regulate the industry. Plus, you usually won’t get your pawned item back until you pay back the loan in full, though the amount of time you have to repay the loan varies by state.
Best for small loan amounts with no credit check
The average pawn shop loan was around $150 in 2017, according to the National Pawnbrokers Association. If you don’t think you’ll qualify for a traditional personal loan, you may want to consider a pawn shop loan. You won’t need a credit check to get one and they may be less risky than a payday loan or title loan.
Watch out for sale of your possessions
If you don’t pay back your loan in time, the pawn shop could sell your items. You may also get hit with fees and additional costs for storage, insurance or renewing your loan term.
6. Payday alternative loans
A payday alternative loan is a short-term loan offered by some federal credit unions. A PAL is designed to be more affordable than a payday loan. Payday alternative loan amounts range from $200 to $1,000, and they have longer repayment terms than payday loans — one to six months instead of the typical few weeks you get with a payday loan.
Best for lower interest rates
If you’re considering a payday loan, see if you qualify for a payday alternative loan first — you’ll likely save money on interest. A federal credit union can’t charge application fees for more than the cost to process your loan application, with a max of $20. Payday loans often charge $15 for every $100 borrowed, which can equate to an APR in the triple digits.
Watch out for membership requirements
To qualify for a payday alternative loan, you’ll need to be a member of a federal credit union for at least a month. If you’re struggling to pay for something right away and aren’t a credit union member, you may want to look for another option.
7. Home equity loans
A home equity loan is a type of secured loan where your home is used as collateral to borrow a lump sum of money. The amount you can borrow is based on the equity you have in your home, or the difference between your home’s market value and how much you owe on your home. You typically can’t borrow more than 85% of the equity you have in your home.
Best for personal loan alternative
Since you’re using your home as collateral, your interest rate with a home equity loan may be lower than with an unsecured personal loan. You can use your home equity loan for a variety of purposes, ranging from home improvements to medical bills.
Watch out for default
Before taking out a home equity loan, make sure the payments are in your budget. If you default on your home equity loan, your lender may foreclose on your home, putting you out of a place to live.Home improvement loans: Which type is best for you?
8. Credit card cash advances
Your credit card may offer a cash advance, which is a short-term loan that you borrow against your card’s available balance.
Best for paying cash
Not all businesses accept credit cards, so if you don’t have cash on hand to pay for something you need, a cash advance may be a good option.
Watch out for fees and high interest
Even though you’re using your credit card, you won’t necessarily have the same interest rate on a cash advance as a normal purchase. You may begin accruing interest as soon as you withdraw the money — and you’ll likely face a processing fee.
Before you think about borrowing money, set your budget so you know what you can afford to pay back on a monthly basis. If you’re consistently running into money troubles, think about contacting a credit counselor or reassessing your expenses.
Hear from an expert
Q: What would you recommend for someone who needs a loan but has no credit?
A: Start to try and build a credit history by setting aside some income each month as savings, and then using the savings as a deposit for a secured credit card or loan.
— Joshua Bernstein, Assistant Professor of Economics at Indiana University Bloomington