Personal loans can be used for a variety of things: buying a car, doing home repairs or even to consolidate other debts and pay down other higher-interest loans.
There are two main types of personal loans: secured and unsecured.
Secured loans require an asset such as a car or a house. That way, if you can’t repay the loan, the lender can repossess that asset. Title loans are secured loans.
Unsecured loans don't require an asset to back it up, but if you can’t repay the loan, you risk being sued. The lender can also exercise the right of offset, which allows them to take money from other sources, like your savings account as payment.
Other loan types:
Fixed-rate loans: A fixed-rate means that the interest rate remains the same throughout the term of the loan, and the payments go toward a portion of the interest and principal. Fixed-rate mortgages, where the rate remains the same for a term of one to five years, are common.
Variable-rate loans: The interest rate on these loans fluctuates based on the prime lending rate. That means your monthly payment may vary based on the prime lending rate, which may be advantageous if we’re in a low-interest or negative interest rate economy.
Co-signer loans: If you have bad credit, or don’t have a substantial credit history, it can be difficult to get approved for a personal loan. In that case, a co-signer loan, also known as a guarantor loan, can help you get the money you need. Essentially, the co-signer is agreeing to pay off your debt in the event that you cannot. Loan approval is contingent on the financial health and creditworthiness of your guarantor. If you do not make payments, both you and your guarantor face penalties and both your credit scores will be impacted.
Debt consolidation loans: If you have multiple loans, you can get a debt consolidation loan that will combine them at a lower interest rate.
Payday loans: These loans are often used as a bridging solution between paycheques or as an emergency infusion of cash. They’re short-term loans for amounts usually less than $1,500. The interest rate on payday loans can be astronomical — rates as high as 400% — which makes them a poor choice for ongoing costs such as food, rent or bill payments. If you don’t have a financial plan to pay back a payday loan, you could find yourself spiralling deeper into debt. Regulators often warn against taking out payday loans, as the high-interest rates can make them difficult to pay off.