Personal loans can help people in times of need. If you have an unexpected expense or need to purchase something that costs more than the savings you have, you can use a personal loan. There are several types of personal loans. Let’s learn about them and understand how they differ from one another.

Unsecured Personal Loan

Most personal loans are unsecured and need no collateral or physical asset to back them. If you struggle to make payments, the lender can’t take anything away from you. That’s why you typically need a good credit score, 670 or higher, to qualify for a personal loan. Or you can get a co-signer with a good credit history. Failing to make payments will wreck your credit score.

Secured Personal Loan

If your credit isn’t great, you may still get a personal loan, but it will have to be secured against an asset to guarantee the loan. A vehicle, a savings account, or a certificate of deposit can act as security. Secured personal loans often come with a low-interest rate since there is collateral that reduces the lender’s risk.

Fixed-Rate Personal Loan

Most personal loans have fixed-rates. This means that the interest rate stays the same over the life of the loan, as does your monthly payment. It means that you know the exact amount you need to pay every month so you can budget for it. You also know how much you will pay in interest over the life of the loan.

Adjustable-Rate Personal Loan

This is not very common. With this loan, your interest rate can change over time. It appeals to people because the interest rate starts off really low but may increase or decrease depending on market conditions. So the amount you pay per month can go up or down. There is a cap in place, but you do run the risk of getting stuck with a higher rate. This type of loan works only if you can pay it off quickly.

There are alternatives like savings, credit cards, lines of credit, and payday loans, but you should weigh the risks of each and understand how they can impact your credit before applying for any of them.