Last year, consumers owed $323 billion on personal loans, an all-time high. This number was up $18 billion from the previous year, 2019.

Personal loans can help those who are in debt find some relief. However, there are times when loans can continue the cycle of debt for an individual.

To avoid this issue, you need to know the different types of personal loans. Understanding the differences can help you decide on the right loan to get out of debt.

Keep reading to learn more.

Unsecured Loans

Most of the types of personal loans are unsecured loans. An unsecured loan means you borrow money without putting anything up for collateral.

Loans of this kind require a higher credit score to prove your creditworthiness. You can use these loans for whatever you want with a lump sum payment.

Secured Loans

Secured personal loans need collateral to secure or take out a loan. If you default on the loan, the lender will seize the property that you put up as collateral.

Most personal loans are unsecured but home and car loans are types of secure personal loans. These loans are easier to get if you have a lower credit score. Since there is collateral, the lender views you as a less risky borrower.

Secured loans are hard money loans that you can get through Trinity Mortgage Fund.

Installment Loans

Installment loans, which allow you to pay for your loan in installments, have a fixed interest rate, so your monthly payment always stays the same. If you need to change the amount of your loan because of your finances, you won’t be able to with this loan. These are loans that have end dates like student and car loans.

Fixed-Rate Loans

In the financial industry, fixed-rate loans are another option where the interest rate does not change over the life of the loan. Because the interest rate is fixed, higher payments are more common per month.

Variable-Rate Loans

If you want a loan for only a few years, a variable-rate loan is a way to go. Variable-rate loans fluctuate interest rates based on an index rate. If the index rate goes up, your loan interest rate does as well.

Credit cards and student loans offer variable-loan rate options.

Cosigned Loans

If you don’t have a strong credit history, you can find someone else who does and get a cosigned loan. A cosigner will vouch for your creditworthiness.

You and the cosigner are responsible for paying the loan on time but it is easier to qualify with a cosigner. Plus, you’ll likely receive a lower interest rate.

Payday Loans

If you need emergency funds, payday loans are short-term loans that can cover expenses until your next payday. The loan terms last for two to four weeks.

For this type of loan, no credit check is required, but you do have to pay higher fees. If you don’t pay your loan off when it is due, you’ll need a new loan which causes a cycle of ongoing debt.

Types of Personal Loans to Consider

When you need a personal loan, it is smart to explore the different options out there. When you understand the types of personal loans, you’ll be able to choose the one that’s right for you.

Choosing the wrong type of loan will cost you more in monthly payments, interest, and total loan costs.

For more personal finance advice, check out the other posts on our blog.