What are the different types of personal loans?

A personal loan can be a useful financial tool, but with plenty of loans to choose from, it’s all about making the right choice for you. We break down the different types of personal loans.

If you have a goal in mind – be it taking the trip of a lifetime, buying a car or investing in your skills through tertiary study, you may decide to get a personal loan to help you pay for it. With so many different personal loans to choose from, it can be confusing to understand which type of personal loan is right for you.

Let’s break it down.

What are the different types of personal loans?

Personal loans can be marketed under a variety of names, but they generally work in much the same way. You borrow a fixed amount, to be repaid by a set date, with repayments made either weekly, fortnightly or monthly. You’ll need to repay the borrowed amount plus interest and fees.

The loan may have a fixed or variable interest rate, but the common thread across different types of personal loans is that the loan term is usually much shorter than for, say, a home loan. With a personal loan, the debt is usually repaid over one to seven years.

Secured versus unsecured personal loans

The different types of personal loans can be broadly classified into ‘secured’ and ‘unsecured’.

A secured personal loan requires an asset, such as a car, to be offered as security (or collateral) for the loan. This means that if you cannot keep up the loan repayments, the lender usually has the right to repossess the asset and sell it to be compensated for the outstanding loan balance.

With an unsecured loan, you won’t have to stump up an asset as security, however the lender may still be able to take legal action to reclaim any money owed if you do not, or cannot, repay the loan. But the interest rate may be higher.

From here there are a wide variety of personal loans to choose from, often catering to different needs and goals. Here’s a look at some common types of personal loans.

Car loans

A car loan is a type of secured personal loan used for the specific purpose of buying a car or ute. If you plan to buy an electric vehicle (EV) or hybrid, some lenders have loans specifically for low emission cars – often with a lower interest rate than standard car loans.

Motorbike loans

Prefer two sets of wheels to four? No problem – a motorbike loan is a type of personal used to pay for your new ride, and it usually works in much the same way as a car loan.

Wedding loans

Weddings are a special event in our lives, but your big day can come with a hefty price tag. On average, couples spend about $36,000 on a wedding, and according to MoneySmart, 60% of couples use a loan to manage the cost. A personal loan can let you celebrate in style, and steadily pay off the cost of your wedding over time.

Holiday loans

As we re-embrace options to travel internationally, a holiday loan or travel loan is a type of personal loan that can help you fund a memorable vacation. Taking out a loan to pay for a trip can add to the cost through interest charges. However, you may potentially be able to pocket savings through early bird discounts on tours or accommodation.

Boat and caravan loans

Caravans and recreational vehicles (RVs) are big business in Australia, with over 770,000 vehicles registered nationally. Boating is even more popular. One in 10 of us have a boat licence and there are around 925,000 registered boats across Australia. If you have a hankering to explore the country or the nation’s waterways, a boat loan or caravan loan is a type of personal loan that can provide the finance to get you started.

Debt consolidation loans

If you’re juggling multiple debts, consolidating all your balances into a single loan can streamline your finances – and potentially save on interest costs and fees. A personal loan can be a useful choice for debt consolidation as the loan can potentially be repaid over a set period of time, which could help to minimise the overall interest charges. But it’s important to compare the debt consolidation loan against your current debts and make sure it doesn’t end up costing you more in the long run.

Renovation and home improvement loans

A home renovation could help you create your dream home and potentially add to your home’s value. But they don’t always come cheap. One option is taking out a personal loan to fund your home improvements. It could suit you if you are making smaller renovations as you can typically borrow up to around $50,000 or $75,000. If you are making environmentally friendly home improvements such as installing solar panels, there are some lenders that offer specific loan options for this.

If you have a home loan, another option could be to refinance. You could either renegotiate with your existing lender and top up your existing loan or find another lender and potentially get a better interest rate or conditions. Bear in mind that fees and charges can apply. Read more about home renovation financing options.

Line of credit loans

A personal line of credit is a type of personal loan that works slightly differently to most. Instead of receiving a lump sum of cash upfront, a line of credit gives the borrower a set funding limit (known as your credit limit), and the money can be drawn down as and when cash is needed. This can be convenient to fund a variety of projects as there is no need to re-apply for funds each time the borrower needs extra cash. Additionally, interest is usually only paid on the amount borrowed, not the entire credit limit.

Student loans

No matter whether you plan to study at TAFE, a private college or university, a quality education can be a great investment in your own skills. Meeting the cost can be challenging however, and some lenders offer personal loans for students, which can provide money to pay for a variety of expenses, such as course fees. These student loans are entirely separate from the High Education Loan Plan (HELP) options available through the federal government.

Guarantor personal loans

A guarantor personal loan involves another person, often a family member, acting as a guarantor for your loan. In essence, this means the guarantor agrees to become responsible for repaying the loan if, for whatever reason, you cannot.

Whatever the personal loan type, what should you consider before applying?

There are many types of personal loans on offer that cater to different needs and goals. But some common rules apply. Be sure to compare personal loans from a variety of lenders to be confident you are paying a competitive interest rate and low fees over a term that suits your budget. Before you apply, consider whether a personal loan is right for your financial situation generally and make sure you will be able to make your repayments on time.

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