The purpose of your loan can determine which kind of loan is appropriate. Some examples include:
- Personal loan from your financial institution: These loans don’t typically require collateral, meaning there is nothing a lender could repossess if you don’t pay as agreed. If you can get a personal loan to pay off credit card debt with a lower-interest-rate personal loan, it could save you money.
Pro: Flexibility, you can use it for whatever you want, including to consolidate other debt.
Con: There may be fees you did not expect, including origination fees.
- Personal line of credit: These work similarly to credit cards, with a limit on how much you can borrow and interest rates that can vary. In many cases, you access it via special checks.
Pro: Flexibility; you can use it when you need it.
Cons: You may need a checking account with the institution that offers it, and a good or excellent credit score is typically required.
- Buy now, pay later (BNPL): These offers are typically made to online shoppers as they check out. If approved, you can defer payments but still receive the item you want upfront. In most cases, these don’t require a hard credit check.
Pro: This model is generally interest-free if paid on time.
Con: Not having to pay up front might tempt you to overspend.
- Secured loans: Collateral (meaning, some property at risk) is pledged by the borrower to secure repayment. Mortgages and auto loans are typical examples. If the loan payments aren’t kept up, the property might have to be forfeited.
Pro: The insurance of collateral means that rates are generally lower.
Con: You lose your property if you default on the loan.