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Personal loans can be secured or unsecured loans. Personal loans are loans that are given for an unspecified reason. Generally, lenders will not inquire as to what a personal loan is going to be used for; however, approval can be easier if this information is disclosed. Lenders are more likely to lend money for a reasonable need rather than for something frivolous.

There are a few different types of popular personal loans. You should understand them all so that when you are considering a personal loan, you choose the right type for your needs.

Types Of Personal Loans

There are three main types of personal loans.

  • Debt Consolidation Loan
  • Line of Credit
  • Payday Loan


A debt consolidation loan is, as the name suggests, a loan used to consolidate debts. When you get a debt consolidation loan the lender will review your debts. You will either borrow the money and repay your debts or the lender will pay the debts for you.

A debt consolidation loan does has associated costs, so one of the biggest considerations to make when deciding whether or not to get one is if it is a good idea in the long run.

Most people choose to get a debt consolidation loan because they will get a small monthly payment which condenses all those debt payments into one and costs less each month. However, in the end the amount of interest may actually make the total cost more expensive then if you were to continue just paying your debts off individually.

To get a debt consolidation loan you can either go through a traditional lender or through a debt consolidation company. If your debts are to the point where you need consolidate them in order to handle them, then chances are a bank loan is not going to be an option. However, getting a loan through a bank will probably be cheaper than getting one through a debt consolidation company.


A line of credit can be either where the bank gives a person a small loan where they simply hand the money to the borrower or it can refer to a credit card. Any type of line of credit is a big responsibility.

This is one of the only loans that have no real purpose. The lender is not loaning money to buy something specific, but rather just to give it to borrower to do with as they wish. Getting a loan directly from a bank is rare. A person has to have almost perfect credit to even be considered for that type of loan, but as we all know, getting a credit card is not as difficult.

Credit cards are well known in the world of lending as a very profitable tool. Credit cards charge higher rates of interest then would be charged for other types of loans. People also easily use up their line of credit, allowing lenders to charge fees and other rates that make them a lot of money. Credit cards can be good for the borrower, but only if they are used responsibly.


Along the same line of a credit card is the payday loan. Payday loans are rather new on the market. What a payday loan is and how it works is that the borrower writes a post dated check to the payday lender. The payday lender gives the borrower a small loan. When the loan term is up, usually less than a month, the lender then cashes the check to pay off the loan.

Payday loans carry very high interest rates. A typical fee schedule would be around 10% or greater interest per $100 borrowed. Additionally, there is a huge risk with these loans because of the involvement of a check. A person who defaults could end up facing criminal charges for passing a bad check.

Payday loans can be beneficial, if used sparingly and in a responsible manner. They are good for a temporary need or as an advance on money to be earned.

All personal loans are considered personal because they are being used to purchase something specific, such as a vehicle or real estate. There are general unsecured loans, as well, since there is no asset being purchased.

Personal loans can be a bit challenging, though. They offer more freedom then other types of loans and can lead to some serious financial issues if a person is not careful.

Challenges Of Personal Loans

Personal loans are, perhaps, the most challenging of all loan types. Lenders see them as risky because there is generally no collateral to back them up. Personal loans are also risky for a borrower who is not financially responsible. That is why lenders are rather strict when offering personal loans.

Debt consolidation loans and payday loans are pretty lenient for the most part. They have a purpose and are generally less risk. Payday loans are actually secured by the check, so they are the least risky type of personal loan.

It is the line of credit that is the riskiest personal loan and one where the most attention is paid to the borrower. With a personal loan the borrower’s credit, employment history and financial details are going to be highly scrutinized before they are approved for the loan.

The biggest challenge with a person loan, though, lies with the borrower. It is important to always have a purpose for the loan and be sure you can afford it. A person should never get a loan simply to get some extra money. In the end it is still just a loan and has to be paid back.

People often get into the most trouble with personal loans. This is due to a number of factors, including:

  • Freedom to spend the money without a specific purpose
  • Ease of getting some types of personal loans
  • Less restrictions and an easier application process then with other types of loans
  • Low monthly payments

It can be easy to see why personal loans can get people in trouble. Being responsible is the key factor to being able to handle a personal loan.

Getting A Personal Loan

Getting a personal loan, as mentioned, can be tricky. However, there are some tips you can use to try to enhance your chances of getting a personal loan.

  • Improve your credit as much as possible
  • Be organized about debt and get all your debts in check
  • Ask for only what you need
  • Have a specific purpose
  • Show the lender you are reliable and can pay back the loan


You should always know what is in your credit report. Be sure to get a copy of your credit report every year. You need to check it over for accuracy and make sure that you report any errors. You will need to be able to explain everything in your credit report. A lender will like to know that you know what is in your report because that shows you are being financially responsible.

To improve your credit you should start trying to settle old debts and you may even consider getting a small loan to start which will improve your credit once you pay it back.


Being organized means that you have everything you need to clearly explain your debts and any trouble you may have had in the past. You need to show statements that you have made payments and show that you are taking care of your financial obligations.


Some people tend to go overboard with personal loans. Since there is no specific purchase being made with a person loan the lender has nothing to base the amount of the loan on except for what the person asks for. You need to be serious about how much money you need and about how much you can afford to borrow.


As mentioned, lenders do not always require a specific purpose for a personal loan, but that does not mean that you do not need one. You should make sure you know what you are going to do with the money. Do not just get a personal loan for the sake of getting some extra money. Remember that a loan is never free and you will pay more than what you borrowed in the end.


One of the major criteria for any loan is the ability of the borrower to pay back the money. With a personal loan this is looked at carefully. A lender will not loan money to someone who can not pay it back. You need to show the lender that you will pay back the money.

Your credit report and current financial status can only show so much. The lender will also want to see that you have good, steady employment. You should be able to show them an employment history that is solid. You should also be able to prove how much income you make and show a record of your earnings for a suitable period.

Personal loans are a great option when you just need some cash, but they are not a way to get easy cash. They are a loan and need to be taken seriously. You now know all the basics about personal loans. If or when you ever need a personal loan you should be able to make the right decisions about getting it.

LOAN GUIDE – Everything You Always Wanted To Know About Loans

Part 1 – Getting An Auto Loan
Part 2 – Home Loans
Part 3 – Commercial Loans
Part 4 – Personal Loans
Part 5 – Student Loans
Part 6 – Securing A Loan
Part 7 – Loan Application

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