The ten types of loans you should know are personal loans, auto loans, student loans, mortgage loans, home equity loans, credit-builder loans, Loans from friends/family, payday loans, auto title loans & pawn shop loans. Each type of loan is helpful for a different purpose, and has different APR ranges, dollar amounts and payoff timelines. One thing most loan types have in common is that the borrower gets a lump sum upfront and pays it off over time. But there are even exceptions to this, such as credit-builder loans.
Types of Loans
- Personal loans
- Auto loans
- Student loans
- Mortgage loans
- Home equity loans
- Credit-builder loans
- Loans from friends/family
- Payday loans
- Auto title loans
- Pawn shop loans
Some loans are secured by collateral, such as home equity loans and auto title loans. Others are unsecured, like student loans and most personal loans. In addition, some loans have a wide range of uses, while others only offer funding for certain expenses. Below, you can learn about all the different types of loans that are available in detail.
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Table of Contents
Different Types of Loans ExplainedLoans vs Other Types of Borrowing OptionsWhat Type of Loan Should I Get?Types of Loans FAQ
Different Types of Loans Explained
Personal Loans
Personal loans are among the most versatile types of loans, providing funds for pretty much any purpose, as long as it’s not illegal. Individual lenders may put restrictions on what their loans can be used for. For example, you generally can’t use a personal loan for college education.
Some lenders may offer numerous personal loan options for different purposes (like medical bills, debt consolidation or weddings), each with its own APR range. LightStream by SunTrust Bank is one example. However, the vast majority of personal loan providers offer loans with nearly limitless uses.
- Typical loan length: 12 to 60 months (sometimes 84+)
- Typical APR range: 6% to 36%
- Minimum loan amounts: $1,000 to $3,000
- Maximum loan amounts: $25,000 to $100,000
- Credit score required: 600 to 700 (average of 660)
- Collateral: Required for secured personal loans, not for unsecured loans
Auto Loans
Auto loans allow borrowers to pay off a vehicle over time. They are typically secured by the car being financed, meaning that if the borrower does not make their payments, the lender can repossess the car to get its money back. Auto loan rates depend on both whether the vehicle is new or used and how long the loan lasts for.
- Payoff timeline: 24 to 72 months
- APRs: 3% to 7%
- Credit score required: No minimum, but better scores get better terms
- Consequence for not repaying: Vehicle repossession
It’s also good to note that people can take out loans for pretty much any other type of vehicle, too, including boats, aircraft and more.
Student Loans
Student loans pay for education and education-related costs. That includes school tuition, housing, food, textbooks, transportation and more. These loans are not supposed to be used for costs unrelated to school, though lenders do not monitor how the money gets spent.
- Payoff timeline: Usually 10 years, up to 25 for $30,000+ in some cases
- Sources: Private companies and the federal government
- APRs for federal student loans: 5% to 8%
- APRs for private student loans: 4% to 14%
- Forgiveness: Possible after 10 years for public service works, 20 - 25 years for others
Mortgage Loans
Mortgage loans allow people to purchase a house without having enough money to pay for it all upfront. With a mortgage, the borrower can live in their home before they’ve paid the full price for it. But the financial institution that issued the loan owns the house until the mortgage gets fully paid off. Mortgages are secured by the house in question.
- Length: 10, 15, 20 or 30 years
- APRs: 3% to 6%
- Credit score required: 620 for private, 580 for government-insured
- Sources: Private companies, government (FHA, VA, USDA)
Home Equity Loans
Home equity loans are just as versatile as personal loans. Borrowers can use them for just about anything. The amount of money that a borrower can take out depends on the equity in their home, which is the house’s worth minus the balance left on the mortgage. Depending on those values, a home equity loan may offer higher dollar amounts than personal loans.
- Loan lengths: 5 to 30 years
- APRs: 4% to 8%
- Credit score required: 680
- Collateral: borrower’s house
- Consequence for not paying: possible foreclosure
Home equity loans are similar to another product called home equity lines of credit (HELOC). Both are secured by your house. The difference is that a HELCO functions like a credit card, in that you can borrow up to a certain amount of money at any time, but aren’t obligated to borrow.
Credit-Builder Loans
Credit-builder loans are loans for people who don’t need to borrow money but want to establish or reestablish a history of timely payments and thus improve their credit. With a credit-builder loan, a financial institution puts money into a savings account (usually $300 to $1,000). Then, the borrower pays this amount to the lender, plus interest at an APR of 6% to 16%, over 6 to 24 months. The lender reports payments to the credit bureaus each month, which helps to build the borrower’s credit history. At the end, the borrower gets access to the savings account with their funds.
Essentially, credit-builder loans work in the reverse of a normal loan. Instead of getting money and then paying it back in installments, the borrower pays money in installments and then gets a lump sum at the end.
Loans from Friends/Family
It’s possible to get a loan from a friend or family member rather than a financial institution. The major benefit to this is the potential for a low interest rate, or even no interest, along with flexible repayment terms. That, of course, depends on how generous the friend or family member is. But he or she will not have the power to pull the borrower’s credit report directly, and is less likely to care about their credit score.
When borrowing from someone you know, it’s important to draw up and sign a loan agreement so that you can be held accountable for borrowing. And it’s important to take borrowing from this person as seriously as borrowing from a financial institution – doing otherwise would be a breach of trust.
Payday Loans
Payday loans are extremely predatory short-term loans that must be paid back with interest when the borrower receives their next paycheck. These loans are usually $500 or less, and the lender will often charge a fee equivalent to a 400%+ APR.
Because the loans are secured by the borrower’s upcoming paycheck, they are available to people who have bad credit. However, due to the enormously high costs, they are absolutely not worth pursuing.
Auto Title Loans
Auto title loans are loans secured by the document that grants legal ownership of a car. The borrower receives 25% to 50% of their car’s value upfront, and then has to pay it back over a short term, usually only 15 to 30 days. If they cannot pay in full within that period, it may be possible to “roll over” the loan for another month in exchange for additional fees.
The costs for an auto title loan can end up being as much as 25% of the loan amount. And if the borrower cannot pay off the loan, the lender can take their car. It’s definitely best to avoid these loans.
Pawn Shop Loans
Pawn shops let people bring in items and receive 20% to 60% of their value in return. The pawn shop takes temporary possession of the item but is not allowed to sell it for a certain amount of time, often a few months. The person who pawned the item can come back at any time during this period and pay off the loan plus interest (which can range from around 2% to 25% per month). If they do, they get their item back. Otherwise, the pawn shop can sell the item to make its money back.
Loans vs. Other Types of Borrowing Options
Loans aren’t the only way to borrow. There are several other ways to finance a purchase, or otherwise afford it, such as a credit card, line of credit or gifted funds.
Loan vs. credit card
With a credit card, the cardholder is never obligated to borrow money and only pays interest on balances they carry from month to month. Plus, the card remains open indefinitely.
Loan vs. line of credit
A line of credit is like a credit card without the physical card. The person who opens a line of credit only has to pay interest on what they borrow, and they aren’t obligated to borrow. However, some lines of credit may have a set “draw period” during which the borrower can take out money.
Loan vs. gift
Loans require repayment, while gifts do not. Gifts are taxable, but it’s the person giving the gift who pays the tax. Gift givers only need to report gifts on their taxes if they give more than $15,000 to any individual person/place in a year (e.g. they can give gifts of $10,000 to multiple places without needing to report it). And they likely won’t have to actually pay tax on gifts of $15,000+ because everyone has a lifetime tax exemption on $11.4 million worth of gifts.
Key Stats by Loan Type
| Type of Loan | Auto Loan | Home Loan | Student Loan | Personal Loan |
|---|---|---|---|---|
| Outstanding Balances | $1.30 trillion | $9.40 trillion | $1.49 trillion | $138 billion |
| Delinquency Rate | 4.6% | 0.9% | 10.8% | 2.35% |
| Median Credit Score | 703 | 759 | N/A | N/A |
Source: Latest Federal Reserve data available
What Type of Loan Should I Get?
While there are many different types of loans available, there is usually one type that will work the best in any given circ*mstance. Student loans are best for education, auto loans are best for cars, etc. And for miscellaneous expenses like medical bills, debt consolidation and more, personal loans are usually the way to go.
Keep in mind that it’s best to take out a loan only when it’s a necessary expense, such as buying a car or house, paying for medical bills, or refinancing existing debt. Using them for vacations or purchasing big luxury items beyond your means can lead to racking up unnecessary and expensive debt. That won’t be good for your wallet or your credit score.
Types of Loans FAQ(65 questions)
Most Popular
What are two common types of loans?
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Grace Enfield, Content Writer
@grace_enfield
Two common types of loans are mortgages and personal loans. The key differences between mortgages and personal loans are that mortgages are secured by the property they're used to purchase, while personal loans are usually unsecured and can be used for anything. One thing most loan types have in common, though, is that the borrower gets a lump sum of money up front and pays it off over time.
Two Common Types of Loans
Loan Type | Mortgages | Personal Loans |
Uses | To purchase real estate | Nearly anything |
Repayment period | Up to 30 years | Up to 12 years |
Collateral required | The home's title | Usually none |
APR | 3% to 6% | 2.49% to 35.99% |
Credit score required | 620 for private, 580 for government-insured | 580+ |
To qualify for a mortgage or a personal loan, you'll need to be at least 18 years old, have a valid bank account and have enough income to make monthly payments.
If you're interested in a personal loan, you can check out the top-ranked personal loan offers, as well as pre-qualify with multiple lenders for free, on WalletHub.
What are the five common types of loans?
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Grace Enfield, Content Writer
@grace_enfield
Five common types of loans include personal loans, auto loans, home equity loans, mortgages and more. Each of these loans is used for a different purpose and has different loan amounts, APRs, payoff periods and fees. But one thing most loan types have in common is that the borrower gets a lump sum of money up front and pays it off over time.
5 Common Types of Loans
- Personal loans
- Auto loans
- Home equity loans
- Mortgages
- Student loans
Along with having different terms, each of these common loan types has different requirements regarding collateral, credit scores, income and more.
What are the 4 types of loans?
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Grace Enfield, Content Writer
@grace_enfield
Four common types of loans include personal loans, auto loans, home equity loans, mortgages and more. Each of these loans is used for a different purpose and has different loan amounts, APRs, payoff periods and fees. But one thing most loan types have in common is that the borrower gets a lump sum of money up front and pays it off over time.
4 Common Types of Loans
Along with having different terms, each of these common loan types has different requirements regarding collateral, credit scores, income and more.
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What is the difference between a home improvement loan and a home equity loan?
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Adam McCann, Financial Writer
@adam_mccann
The biggest differences between a home equity loan and a home improvement are that borrowers can get more money, lower interest rates and longer payoff times with a home equity loan, but they have to use their home as collateral. In contrast, the term “home improvement loan” generally refers to an unsecured personal loan used for the purpose of home improvement. Most personal loans can be used for any purpose and do not require collateral.
Home equity loans also can be used for anything (including home improvement). But unlike the majority of personal loans, they are secured. If you fail to pay back your home equity loan, it's possible the lender could foreclose on your house. Because of this, home equity loans are riskier for borrowers than personal loans for home improvement.
Home equity loans have the potential to be larger than personal loans, however. The amount you can borrow is based on your house's market value minus the amount left to pay on the mortgage. You likely won't be able to borrow 100% of your house's equity, though. The lender will set a percentage.
Home equity loan vs. home improvement loan:
Category | Home Equity Loan | Home Improvement Loan |
Can be used for home improvement? | Yes | Yes |
Secured? | Yes (by home) | No (in most cases) |
Amount you can borrow | Percentage of home equity (value minus mortgage balance) | $1,000 - $100,000 |
Years to pay back | 5 - 30 | 1 - 5 (occasionally longer) |
Interest rates | 4% - 8% | 6% - 36% |
Usual credit score requirement | 680+ | 660+ for no origination fee 585 - 659 with an origination fee |
Pre-qualification? | No | Yes |
Approval/funding timeline | A month or more | Less than a week |
Home Equity Loan or Home Improvement Loan: Which is Better?
- Home equity loans are better if you're looking for the lowest interest rates, very long payoff periods, and especially large loan amounts.
- Home improvement loans are better if you don't want to put your home at risk, you have little equity in your home, or you need funding quickly.
Both types of loans are good for paying off home improvement expenses. But personal home improvement loans are definitely the less risky option.
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Which is better, a home equity loan or a personal loan?
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Adam McCann, Financial Writer
@adam_mccann
The biggest difference between a home equity loan and a personal loan is that a home equity loan is secured by a house while a personal loan has no collateral in most cases. Home equity loans and personal loans also differ in terms of their repayment period, interest rates and the amount available to borrow. A home equity loan's repayment period lasts 5 - 30 years, according to Experian, while a personal loan usually lasts 1 - 7 years. Interest rates on home equity loans typically range from 4% to 8%, while personal loans typically charge 6% - 36%.
Personal loan amounts range from $1,000 to $100,000. Home equity loans, on the other hand, don't really have an upper limit. That's because home equity loans allow you to borrow against the value of your home, minus the amount you have left to pay on the mortgage, otherwise known as your “equity.” So the more valuable your house is and the more money you've paid on your mortgage, the higher your equity is and the more you can borrow.
Your home serves as collateral with a home equity loan. So if you default, the lender may be able to foreclose on your house to ensure they get paid. Most personal loans are unsecured, meaning the lender doesn't have any collateral to take possession of if you default. But there are some personal loans that are secured, using things like auto titles, stocks or your next paycheck as collateral.
Both home equity loans and personal loans offer you a lump sum of money which you pay back over time along with interest charges. And when you apply for both, lenders will consider your credit score, income and other debts, among various other factors.
Home Equity Loans vs Personal Loans:
Category | Home Equity Loan | Personal Loan |
Repayment period | 5 - 30 years | 1 - 7 years |
Interest rates | 4% - 8% | 6% - 36% |
Loan amount | Based on your home equity | $1,000 - $100,000 |
Secured? | Yes, by your home | Sometimes, mainly for bad credit |
Typical credit score needed | 680+ | 585+ (660+ for no origination fee) |
Top 10 banks | 5/10 offer | 7/10 offer |
Pre-qualification? | No | Yes |
Conclusions: When to Get Home Equity vs Personal Loans
Home equity loans are better if you want more time to pay the loan off, lower interest rates and potentially larger loan amounts.
Personal loans are better if you don't want to (or can't) use your home as collateral, especially if you would like a larger variety of lenders to choose from. They're also ideal if you want the opportunity to pre-qualify before applying.
Top Alternatives to Consider
It's useful to note that there are several alternatives to using either a home equity loan or a personal loan. One alternative is a “home equity line of credit.” Unlike a home equity loan, which offers a lump sum of money, a home equity line of credit lets you borrow money whenever you need it during a set period of time. But there's no obligation to borrow. You can think of it as a giant credit card that's secured by your house.
For smaller borrowing amounts, credit cards are also an option, though their APRs tend to be more expensive than those of home equity loans and personal loans. However, there are some credit cards that offer an introductory 0% APR for a certain number of months.
What type of loan is a personal loan?
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Grace Enfield, Content Writer
@grace_enfield
A personal loan is an installment loan that can offer up to $100,000 in funding with a fixed APR around 4% to 36% and a repayment period of 12 - 84 months. You generally need a credit score of 580+ to get a personal loan from a reputable lender. Most personal loans don't require collateral, which is why they're sometimes called signature loans, but some secured personal loans are available.
Key Facts About Personal Loans
- Loan Type: Installment
- Typical Uses: Debt consolidation, home improvements, large purchases and more
- Loan Amounts: Up to $100,000
- APRs: Usually from 4% - 36%
- Repayment Periods: Typically from 12 - 84 months
- Origination Fee: 0% - 8%
- Funding Timeline: Within 7 business days
- Minimum Credit Score Requirement: Usually 580+
You can check out WalletHub's picks for the best personal loans to learn more. You can also estimate your potential rates with our free pre-qualification tool.
What is an Xact loan?
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Grace Enfield, Content Writer
@grace_enfield
An Xact loan is an online installment loan of $1,000 - $5,000 with an APR of 145% - 225% and a repayment period of up to 18 months. Xact also offers funding as soon as the next business day after your application information is verified.
These loans are available in 32 U.S. states. Additionally, the company suggests borrowers use the loans for debt consolidation.
Key Facts About Xact Loans
- Loan amounts: $1,000 - $5,000
- APRs: 145% - 225%
- Repayment periods: up to 18 months
- Origination fee: 0%
- Prepayment fee: 0%
- Funding timeline: As soon as the next business day after the company verifies your information
- Credit score requirement: Not disclosed
- Residency requirement: Live in one of the 32 states where Xact operates (New York, Pennsylvania, Illinois, Georgia and North Carolina are the biggest states excluded)
- Loan use: The company suggests borrowers use the loans for debt consolidation
To learn more, check out reviews and key information about Xact on WalletHub.
What is an installment loan?
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John S Kiernan, Managing Editor
@John
An installment loan is a fixed amount of money that you receive in one lump sum and then repay in equal portions at regular intervals, which are known as installments. There are many different types of installment loans, from mortgages to personal loans. Some installment loans can only be used for one specific purpose, while others can be used for anything.
On the other hand, credit cards and lines of credit are not installment loans. They are types of revolving credit, since neither the amount borrowed nor the resulting monthly payments are predetermined.
Types of Installment Loans
What are three common types of loans?
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Grace Enfield, Content Writer
@grace_enfield
Three common types of loans are personal loans, auto loans and mortgages. Most people buy a home with a mortgage and new cars with an auto loan, and more than 1 in 5 Americans had an open personal loan in 2020.
There are a number of differences between these types of loans, including what they're used for, loan amounts, APRs, payoff periods and collateral required. But one thing most loan types have in common is that the borrower gets a lump sum of money up front and pays it off over time.
Three Common Types of Loans Compared
Loan Type | Personal Loans | Auto Loans | Mortgages |
Uses | Nearly anything | Purchasing a car | To purchase a house |
Payoff periods | 1 to 12 years | 2 to 6 years | Up to 30 years |
Collateral required | None | The vehicle being financed | The home's title |
APR | 2.5% to 36% | 3% to 7% | 3% to 6% |
Loan amounts | $1,000 to $100,000 | Varies by vehicle | Depends on your income and credit |
Credit score required | 580+ | No universal minimum | 620+ for conventional loans |
If you're interested in a personal loan, check out the free pre-qualification tool on WalletHub. This tool allows you to see which lenders may approve you and what rates may be available to you.
How does loan insurance work?
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Adam McCann, Financial Writer
@adam_mccann
Loan insurance is a policy that protects you if you are unable to make loan payments for a certain amount of time due to circ*mstances out of your control, like medical issues or unemployment. There are different types of loan insurance. One type will make loan payments for you up to a certain amount of money during your time of hardship. Another will pay off loans in the event of your death. And another will protect your collateral if you have a secured loan.
Loan insurance can provide some peace of mind and help you avoid credit score damage from late payments. But it's important to weigh the costs against the benefits, and read the fine print, before purchasing this insurance.
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