10 types of loans for your home, education and beyond: Which should you borrow? (2024)

Whether you’re in the market for a new car, want to buy a house, need to pay for college or hope to consolidate debt, different types of loans can help you accomplish your goals.

Americans collectively carry $17.5 trillion in debt, according to the Federal Reserve — debt balances are at record-high levels across the board. Before you commit to new debt, it’s essential to understand which type of loan can best meet your needs. We’ll explore 10 of the most common types of loans and tell you how to compare your options.

10 types of loans to know

1. Personal loans

Loan purposes: Debt consolidation, home improvement projects, medical bills, major purchases and unexpected expenses

APRs: 7% to 36%

Loan type: Typically unsecured, but some lenders offer secured personal loans

A personal loan is an unsecured form of debt with fixed interest rates. Lenders provide a lump sum of cash (usually between $1,000 and $100,000), and then borrowers repay it in fixed monthly installments over one to seven years. You can usually apply for and get a personal loan in a day or two, depending on the lender.

Compared to other types of loans, personal loans are highly versatile. You can use them for nearly any purpose, from consolidating high-interest debt to funding a home renovation or paying for a wedding. Personal loans are available via banks, credit unions and online lenders. Your eligibility is determined by your creditworthiness — you’ll need good-to-excellent credit and a low amount of debt relative to your income.

Here’s a look at current personal loan interest rates by credit score:

2. Mortgages

Loan purpose: Buying or refinancing a home

APRs: Between 6% and 7%, on average

Loan type: Secured

A mortgage is used to purchase a home and is a necessary part of homeownership for most buyers. These loans come with longer terms, such as 15 or 30 years. There are several types of mortgages, but the most common is a conventional 30-year, fixed-rate loan. Rates can be fixed or variable, and they fluctuate daily with the market.

In most cases, you’ll need credit scores above 620 to qualify for a mortgage, and you must make a down payment of at least 3% (though a larger down payment can result in lower rates). Since a mortgage is secured by your property, your lender may foreclose on your home if you fail to keep up with the payments.

The US government guarantees several types of mortgages, including FHA loans (for buyers with lower income or credit scores), VA loans (for service members and veterans) and USDA loans (for low-income buyers in rural areas). These programs typically have more lenient down payment and credit score requirements, making them accessible to more homebuyers.

Mortgages can be found at banks, credit unions, online lenders, mortgage marketplaces and brokers. Compare multiple loan offers to find the best mortgage lender. Here’s a look at current mortgage rates:

Related >> The best mortgage lenders for refinancing

3. Home equity loans and HELOCs

Loan purpose: Home renovation, debt consolidation or large expenses

APRs: Between 8% and 10%, on average

Loan type: Secured

Also known as second mortgages, home equity loans allow you to borrow against the equity you’ve built in your home, which is the difference between your home’s current value and your mortgage balance. The funds are disbursed in a lump sum, and you make fixed monthly payments to repay the loan over five to 30 years. Typically, you can borrow about 80% of your equity, though some home equity lenders may allow up to 90%.

A home equity line of credit (HELOC) also taps your home equity but works more like a credit card (it similarly carries a variable APR). You can borrow as much or as little as you’d like, up to a set credit limit, and repay only what you borrow. While home equity loan and HELOC funds can be used in a wide variety of ways, many homeowners use them to consolidate debt or cover large expenses, like home improvement projects.

4. Auto loans

Loan purpose: Buying a vehicle

APRs: Starting around 4.5%

Loan type: Secured

Auto loans help you finance a vehicle, like a car, truck, SUV or van. They’re secured by the vehicle itself, which means your lender can repossess it if you fall behind on payments. These loans typically come with repayment terms between two and eight years, and your interest rate is determined by your credit scores — the higher your scores, the lower your rate is likely to be.

You can get auto loans through banks, credit unions and online lenders. Most car dealerships have an in-house financing department that presents partner lender offers, though these loans are typically more expensive. If you’re buying a new car, many automakers run promotional 0% or low-APR specials, but you’ll need excellent credit to qualify.

Related >> The best auto loans for bad credit

5. Small business loans

Loan purpose: Small business expenses

APRs:Starting around 5%

Loan type: Depends on the loan type

Small business loans are offered by private lenders and the Small Business Administration (SBA). While SBA loans are distributed by banks, credit unions and online lenders, they’re partially guaranteed by the SBA. If you fail to make the payments, the SBA may reimburse the lender for the outstanding balance — this guarantee allows lenders to offer more competitive rates and expanded eligibility.

“The SBA offers many different types of loans, starting with microloans of $50,000 or less that help fledgling enterprises get off the ground,” said Jay Avigdor, CEO of Velocity Capital Group, a small business lender. “These funds can be used for anything from buying machinery and other equipment to purchasing supplies and furniture, and can also be used as working capital.”

Although business loan requirements vary by lender and loan type, you’ll typically need good personal credit scores, annual revenue between $60,000 and $250,000, at least six months in business and a strong business plan.

Related >> The best startup business loans

6. Student loans

Loan purpose: College or graduate school costs, including tuition, fees, books and living expenses

APRs: 5.50% to 8.05% for federal student loans, 4% and up for fixed-rate private student loans

Loan type: Unsecured

There are two types of student loans: federal and private student loans. Federal loans offer substantial borrower protections, from income-driven repayment options like the SAVE plan to forgiveness opportunities, including the Public Service Loan Forgiveness (PSLF). Interest rates are fixed and set annually by Congress. To apply for federal student loans, complete the FAFSA.

Private student loans are offered by banks, credit unions and online lenders. Your eligibility is based on your credit scores and income, so many student borrowers apply with a cosigning parent. Private loans can have fixed or variable interest rates: Although these rates can be lower than those on federal loans if you have excellent credit, private loans lack the robust borrower safeguards you’ll find with federal loans.

Generally, it’s wise to prioritize non-borrowing options first, like grants and scholarships, and then to max out your federal loan allotment before considering private loans.

7. Recreation loans

Loan purpose: Boats, RVs, powersport vehicles, motorcycles

APRs: Starting around 7%

Loan type: Secured

Recreation loans allow you to finance “fun” vehicles, like boats, RVs, motorcycles, campers, ATVs and jet skis. Like auto loans, recreation loans are secured by the financed vehicle. If you can’t make the monthly payments, the lender can repossess your new toy.

Recreation loans can usually be found at banks, credit unions, online lenders or dealers. Some lenders offer vehicle-specific loans, while others suggest using a personal loan to finance your purchase. Rates and terms vary by lender and vehicle — for example, you may find motorcycle loans with terms up to seven years, while boat loans commonly have terms as long as 20 years and maximum loan amounts in the millions.

Since recreational vehicles are considered “luxury” items, you’ll need good to excellent credit and a low debt-to-income ratio to qualify. It can be risky to borrow a high dollar amount for a want instead of a need, so be certain you can afford the loan before committing to unnecessary debt.

8. Credit-builder loans

Loan purpose: Establishing a credit history

APRs: Starting around 3%

Loan type: Secured

Credit builder loans (CBLs) help you establish a credit history or improve your credit scores by making on-time payments. Typically offered by community banks and local credit unions, CBLs tend to be loans of $1,000 or less, with repayment terms between six months and two years.

Unlike with traditional loans, the lender holds your loan amount in a savings or certificate of deposit (CD) account while you make monthly payments (plus interest). You'll receive access to the loan funds when you’ve repaid the loan in full. Since the goal is to build your credit, look for a lender that reports your on-time payments to all three credit bureaus: Equifax, Experian and TransUnion.

Borrowing a credit-builder loan increases your odds of establishing credit scores by 24%, according to a 2020 Consumer Financial Protection Bureau (CFPB) study. But be careful — a CBL could do more harm than good if you don’t make the payments on time. In fact, the CFPB found that 39% of borrowers made at least one late payment toward their CBL.

9. Payday alternative loans

Loan purpose: Various expenses

APRs: Up to 28%

Loan type: Unsecured

Payday loans typically have predatory rates as high as 400% and can trap borrowers in a cycle of debt. In response, the National Credit Union Administration (NCUA) created a safer option: payday alternative loans (PALs).Offered exclusively by credit unions, PALs have a maximum interest rate of 28%. There are two types of PALs:

• PAL I: Loan amounts are between $200 and $1000, and repayment terms range from one to six months. You must be a credit union member for at least one month before applying for a PAL I.
• PAL II: Loan amounts are as high as $2,000, and repayment terms range from one month to one year. No waiting period is required, and overdraft fees may not be assessed.

Not every credit union offers PALs. To find a credit union near you that offers this type of loan, use the NCUA’s search tool and filter by payday alternative loans under the “Additional Search Option” toggle.

10. Family loans

Loan purpose: Various expenses

APRs: Varies greatly

Loan type: Unsecured

Family loans are funded by family members or friends instead of traditional lenders, like banks and credit unions. If you borrow money from a loved one, be sure to put the details in writing so everyone is on the same page about borrowing amounts, interest charges and repayment terms. This could be a good option if you have poor credit and don’t qualify for traditional financing.

But if you don’t repay a family loan as agreed, you can damage your personal relationship, so only borrow from a loved one if you’re sure you can repay the funds. Or, nail down the specifics of what would happen if your repayment goes awry. Creating a loan contract can help.

High-risk loans to avoid

While every loan carries some risk (like losing an asset in the case of secured loans or damaging your credit in the event of missing payments), some lending products are riskier than others. The following options should be avoided, if possible:

• Payday loans are small, short-term loans designed to be repaid within two to four weeks (or on your next payday). With APRs as high as 400% and such a short repayment timeline, many borrowers struggle to repay these loans on time.
  “The high interest rates of payday loans, plus associated fees, can quickly lead to situations where you end up getting behind on the loan and have to borrow more and more in order to pay it back,” said Kendall Meade, certified financial planner at online bank SoFi.
• Title loans use your car’s title as collateral. Like payday loans, these short-term loans provide small dollar amounts and have very high APRs. You also risk losing your car if you don't repay the debt.
• Pawnshop loans are short-term loans secured by something valuable you own, like a guitar or a diamond ring, and your loan amount is a fraction of the value of your pawned item. Like other high-risk loans, rates can be in the triple digits. Plus, the pawnshop will sell your item if you default on your loan.

How to choose the best loan for you

These questions can help you zero in on the right loan for your needs:

How do I plan to use the money? Your loan use will likely dictate which borrowing option is right for you. For example, a personal loan could be the right choice to consolidate high-interest debt. If you need funds to grow your business, a small business loan is best.

What about loan use restrictions? A mortgage can only be used to buy a home, for instance. Personal loans are flexible in their use, but most lenders won’t allow you to put funds toward business expenses or college tuition.

How much do I need to borrow? Determine how much money you’ll need and how much you can comfortably afford to repay (perhaps using an online loan payment calculator). A family loan or payday alternative loan may not offer enough money to cover a large purchase.

How quickly do I need the funds? If your expense is urgent, prioritize loan types and lenders that offer fast funding. A personal loan may be disbursed as quickly as the same day you apply, while it can sometimes take months to receive business loan funds.

Comparing loan options

The best way to find a competitive interest rate, regardless of the type of loan you need, is to receive offers from multiple lenders. To zero in on the best lender, review your loan offers and compare the following factors:

• APRs: Annual percentage rates (APRs) represent the cost of borrowing money. The lower your APR, the less you’ll pay in interest and fees. Note that if you have less-than-perfect credit, you may have to settle for a higher rate.
• Borrowing amounts: You may find that some lenders will offer you more money than others. Generally, a high credit score and stable income can lead to higher loan amounts.
• Fees: Many lenders charge fees for origination, late payments and closing costs to cover their administrative costs. Some fees are included in a loan’s APR. Look for a lender that charges fewer fees than its competitors.
• Special perks: Sometimes, lenders go the extra mile and offer additional benefits to borrowers. These may include free credit score monitoring, financial hardship programs and rate discount opportunities.