It’s always a good idea to save up money before making a large purchase. But in reality, that’s not always possible. That’s especially true for expenses like a college education, a car or a home, or even unexpected emergencies, like medical bills.

　　When you can’t save money in advance, you can take out a loan. However, you’ll need to understand what type of loan to shop for because there are specific loans for certain purchases.

　　Here are 16 types of loans that can help you make necessary purchases in your life:

　　1. Personal Loans

　　Personal loans are the broadest type of loan category and typically have repayment terms between 24 and 84 months. They can be used for just about anything except for a college education or illegal activities. People commonly use personal loans for things like:

　　Vacations

　　Weddings

　　Emergencies

　　Medical treatment

　　Home renovations

　　Debt consolidation

　　Relocating to a new city

　　Computers or other pricey electronics

　　Personal loans generally come in two forms: secured and unsecured. Secured loans are backed by collateral—such as a savings account or a vehicle—that a lender can take back if you don’t repay your full loan amount.

　　Unsecured loans, on the other hand, require no collateral and are backed by your signature alone, hence their alternate name: signature loans. Unsecured loans tend to be more expensive and require better credit because the lender takes on more risk.

　　Applying for a personal loan is easy, and typically can be done online through a bank, credit union or online lender. Borrowers with excellent credit can qualify for the best personal loans, which come with low interest rates and a range of repayment options.

　　2. Auto Loans

　　Auto loans are a type of secured loan that you can use to buy a vehicle with repayment terms between three to seven years. In this case, the collateral for the loan is the vehicle itself. If you don’t pay, the lender will repossess the car.

　　You can typically get auto loans from credit unions, banks, online lenders and even car dealerships. Some car dealerships have a financing department where they help you find the best loan from partner lenders. Others operate as “buy-here-pay-here” lenders, where the dealership itself gives you the loan. These tend to be much more expensive, though.

　　3. Student Loans

　　Student loans are meant to pay for tuition, fees and living expenses at accredited schools. This means that you generally can’t use student loans to pay for specific types of education, such as coding bootcamps or informal classes.

　　There are two types of student loans: federal and private. You get federal student loans by filling out the Free Application for Federal Student Aid (FAFSA) and working with your school’s financial aid department. Federal student loans generally come with more protections and benefits but charge slightly higher interest rates. Private student loans come with much fewer protections and benefits, but if your credit is good, you could qualify for better rates.

　　4. Mortgage Loans

　　Mortgages help you finance the purchase of a home, and there are many types of mortgages available. Banks and credit unions are common mortgage lenders; however, they may sell their loans to a federally-sponsored group like Fannie Mae or Freddie Mac if it’s a qualified mortgage.

　　There are also government-backed loan programs available for certain groups of people, including:

　　USDA loans for rural, low-income homebuyers.

　　FHA loans for people with low- to moderate-income levels.

　　VA loans for active-duty servicemembers and veterans.

　　5. Home Equity Loans

　　If you have equity in your home, you might be able to use a home equity loan, also known as a second mortgage. The equity you have in your home—the portion of your home that you own, and not the bank—secures the loan. You can typically borrow up to 85% of your home’s equity, which is paid out as a lump sum amount and repaid over five to 30 years.

　　To find out your home’s equity, simply subtract your mortgage balance from your home’s assessed value. For example, if you owe $150,000 on your mortgage and your home is worth $250,000, then your equity is $100,000. Considering the 85% loan limit rule, and depending on your lender, you could potentially borrow up to $85,000 with $100,000 in equity.

　　6. Credit-builder Loans

　　Credit-builder loans are small, short-term loans that are taken out to help you build credit. Since they’re marketed toward people with zero or limited credit, you don’t need good credit to qualify, unlike regular loans. You can typically find credit-builder loans at credit unions, community banks, Community Development Financial Institutions (CDFIs), lending circles or online lenders.

　　Instead of receiving the loan funds up front as you would on a traditional loan, you make fixed monthly payments and receive the money back at the end of the loan term. Credit-builder loans typically range between $300 to $3,000 and charge annual percentage rates (APRs) between 6% and 16%.

　　Credit-builder loans can be a very affordable and safe way to start building credit, especially for young people. If you put your payments on auto-pay, for example, you’ll never have to worry about making your payments and you can build credit entirely on auto-pilot.

　　7. Debt Consolidation Loans

　　Debt consolidation lets you streamline your payments by applying for a new loan to pay off your other debts, therefore leaving you with only one monthly loan payment. If you have high-interest debts like credit cards or a high-interest personal loan, a debt consolidation loan can help you in two ways. First, you could qualify for a lower monthly payment. Second, you could qualify for lower rates, which can help you save money over the long term.

　　In order to get a debt consolidation loan that improves your payments, though, you’ll need to first shop around for a lower rate than your current loan or credit card. You’re also more likely to qualify if your credit has improved since you took out your current loan or card. Once you qualify, your lender may automatically pay the debts for you, or you will need to do it yourself.

　　8. Payday Loans

　　Payday loans are a type of short-term loan, usually lasting just until your next paycheck. These loans aren’t credit-based, and so you don’t need good credit to qualify. However, these loans are often predatory in nature, for a couple of reasons.

　　First, they charge very high finance fees, which can work out to around 400% APR in some cases (the finance fee isn’t the same thing as an APR). Second, they allow you to roll over your loan if you can’t pay it off by your next paycheck. It sounds helpful at first—until you realize even more fees are tacked on, which trap a lot of people in debt obligations that can be higher than what they originally borrowed.

　　9. Small Business Loans

　　There are several types of small business loans, including Small Business Administration (SBA) loans, working capital loans, term loans and equipment loans. These loans help small businesses, typically companies with up to 300 employees, fund their operations. Local businesses—like landscapers, hair salons, restaurants or family-owned grocers—and sole proprietors—such as freelancers who still have a traditional day job—also can apply.

　　Small business loans typically have more qualification requirements than personal loans, especially if you’re applying for an SBA loan. However, the rewards are well worth it because these loans can give your business the financing it needs to grow. Alternative business financing methods, like invoice factoring or merchant cash advances, may be more costly, leaving small business loans as the best option for business financing.

　　10. Title Loans

　　Title loans are another type of secured loan where you pledge the title for a vehicle you own—such as a car, truck or RV—as collateral. Your loan limit typically is anywhere between 25% to 50% of your car’s value, evaluated by the lender. Lenders that offer title loans also charge a monthly fee of 25% of the loan amount, which translates to an annual percentage rate (APR) of at least 300%, making these a costly financing option.

　　These loans are different from traditional auto or RV loans for a few reasons:

　　They charge very high rates.

　　You give the title to the lender as collateral for the loan.

　　They’re short-term loans, typically up to 30 days.

　　Thus, title loans generally fall in the same category as payday loans: they’re very expensive, short-term, small-dollar loans that are often considered predatory.

　　11. Pawnshop Loans

　　Pawnshop loans are another type of loan we usually don’t recommend because they’re very expensive, have small loan limits and require quick repayment. To get a pawnshop loan, you’ll bring something of value to the pawnbroker, such as a power tool, a piece of jewelry or a musical instrument.

　　The pawnbroker will assess the item, and if they offer you a loan, it’ll typically be worth 25% to 60% of the item’s resale value. You’ll receive a pawn ticket, which you’ll need when you return to repay the loan, typically within 30 days. If you don’t return, or if you lose your ticket, the pawnbroker gets to keep your item to resell and recoup their money.

　　12. Boat Loans

　　Boat loans are specifically designed to finance the purchase of a boat and are available through banks, credit unions and online lenders. The loans can either be unsecured or secured, with secured loans using your boat as collateral. As with any vehicle-related loan, it’s crucial to keep depreciation in mind.

　　Boats and other vehicles lose value over time, especially if you buy a new boat. If you choose a long-term loan, don’t make a very large down payment and/or sell your boat soon after you buy it, it’s possible to owe more on the loan than you can sell it for. This means you’ll need to keep paying off the loan even after you sell the boat, and that’s not an enviable position to be in.

　　13. Recreational Vehicle (RV) Loans

　　RV loans can either be unsecured or secured loans. Smaller RV loans are typically unsecured and work similarly to a personal loan while expensive, luxury RVs are secured—with the RV serving as collateral—and work more like an auto loan.

　　Depending on the lender, you can find RV loans for around $25,000 that you repay over a few years, but you also can find loans up to $300,000 that you repay over 20 years.

　　RVs are fun and they can help you and your family enjoy quality time together. But it’s important to keep depreciation in mind, especially if you’re buying a new RV and you think you’ll be selling it at some point down the line.

　　14. Family Loans

　　Family loans are informal loans that you get from family members (and sometimes friends). You may choose to turn to family if you can’t qualify for a traditional loan from a bank or lender, for example.

　　Family loans can be useful because you don’t need any credit to get one. If your family member trusts you and they have the financial means to do so, they can choose to give you the loan.

　　But that doesn’t mean you should take advantage of your family member’s generosity. It’s still a good idea to draft up and sign a loan agreement, including interest payments, due dates, late fees or other consequences for non-payment. You can find draft agreements and payment calculators online to help you do this.

　　15. Land Loans

　　There are a lot of reasons people buy land. Maybe they want to build a house on it, harvest its natural resources or lease it out to other people and businesses. But land can be expensive, and that’s where a land loan can come in handy.

　　Land loans generally come in two forms: improved and unimproved land loans. Improved land loans are for plots that are ready to build on. For example, they might have a well and septic tank already installed, power lines or a driveway. Unimproved land loans, on the other hand, are for a plot of vacant land, which may or may not be easy to access.

　　If you choose to take out a land loan, you can expect to have higher interest rates and more strict down payments and credit requirements than other property loans because they’re a more risky transaction for a lender.

　　16. Pool Loans

　　Unless you’re buying an inflatable kiddie pool, chances are you’ll need to take out a loan if you want to add a pool to your property. Pools can run anywhere from $3,000 up to $100,000 or more depending on how fancy you want to go, according to Fixr.

　　Just like with RVs, boats and other lifestyle loans, it’s a good idea to consider the resale value of your house if you add a pool onto it. Not everyone wants to own a pool, so if you plan on selling your house in the future, you could be limiting the number of people who want to buy your home.

　　Alternative Financing Options

　　We’ve talked about a lot of the different types of loans you can get. But if you need to borrow cash, you have other financing options beyond loans, including:

　　Credit cards. Credit cards are an easy way to pay for all but the largest purchases, and may even come with rewards for specific expenses.

　　Line of credit. You can get a line of credit from your bank or credit union. You can even get secured credit, such as a home equity line of credit (HELOCs).

　　Gift. If you have a wealthier friend or family member and you don’t mind schmoozing them up, you can sometimes get the cash you need that way. Many parents save for their child’s college education or even down payments on a home, for example.

　　Understanding Different Loan Types

　　Borrowed money can be used for many purposes, from funding a new business to buying your fiancée an engagement ring. But with all of the different types of loans out there, which is best—and for which purpose? Below are the most common types of loans and how they work.

　　KEY TAKEAWAYS

　　Personal loans and credit cards come with high interest rates but do not require collateral.

　　Home-equity loans have low interest rates, but the borrower’s home serves as collateral.

　　Cash advances typically have very high interest rates plus transaction fees.

　　Personal Loans

　　Most banks, online and on Main Street, offer personal loans, and the proceeds may be used for virtually anything from buying a new 4K 3D smart TV to paying bills. This is an expensive way to get money, because the loan is unsecured, which means that the borrower doesn’t put up collateral that can be seized in case of default, as with a car loan or home mortgage. Typically, a personal loan can be obtained for a few hundred to a few thousand dollars, with repayment periods of two to five years.

　　Borrowers need some form of income verification and proof of assets worth at least as much as the amount being borrowed. The application is typically only a page or two in length, and the approval or denial is generally issued within a few days.

　　Best and Worst Rates

　　The average interest rate for a 24-month commercial bank loan was 10.21% in the fourth quarter of 2019, according to the Federal Reserve.1 But interest rates can be more than three times that amount: Avant's APRs range from 9.95% to 35.99%.2 The best rates can only be obtained by people with exceptional credit ratings and substantial assets. The worst must be endured by people who have no other choice.

　　A personal loan is probably the best way to go for those who need to borrow a relatively small amount of money and are certain they can repay it within a couple of years. A personal loan calculator can be a useful tool for determining what kind of interest rate is within your means.

　　Bank Loan vs. Bank Guarantee

　　A bank loan is not the same as a bank guarantee. A bank may issue a guarantee as surety to a third party on behalf of one of its customers. If the customer fails to fulfill the relevant contractual obligation with the third party, that party can demand payment from the bank.

　　The guarantee is typically an arrangement for a bank’s small-business clients. A corporation may accept a contractor’s bid, for example, on the condition that the contractor’s bank issues a guarantee of payment in the event that the contractor defaults on the contract.

　　Credit Cards

　　Every time a consumer pays with a credit card, it is effectively equivalent to taking out a small personal loan. If the balance is paid in full immediately, no interest is charged. If some of the debt remains unpaid, interest is charged every month until it is paid off.

　　The average credit card interest rate carried a 16.88% APR at the end of the fourth quarter of 2019, according to a the Federal Reserve—down slightly from the 2019 second quarter rate of 17.14%, but almost exactly where it was (16.86%) at the end of the fourth quarter of 2018.3 Penalty rates, for consumers who miss a single payment, can get bumped even higher—for example, to 31.49% on at least two of HSBC's Mastercards.4

　　Revolving Debt

　　The big difference between a credit card and a personal loan is that the card represents revolving debt. The card has a set credit limit, and its owner can repeatedly borrow money up to the limit and repay it over time.

　　Credit cards are extremely convenient, and they require self-discipline to avoid overindulging. Studies have shown that consumers are more willing to spend when they use plastic instead of cash. A short one-page application process makes it an even more convenient way to get $5,000 or $10,000 worth of credit.

　　Home-Equity Loans

　　People who own their own homes can borrow against the equity they have built up in them. That is, they can borrow up to the amount that they actually own. If half of the mortgage is paid off, they can borrow half of the value of the house, or if the house has increased in value by 50%, they can borrow that amount. In short, the difference between the home’s current fair market value and the amount still owed on the mortgage is the amount that can be borrowed.

　　Low Rates, Bigger Risks

　　One advantage of the home-equity loan is that the interest rate charged is far lower than for a personal loan. According to a survey conducted by ValuePenguin.com, the average interest rate for a 15-year fixed-rate home equity loan as of Feb. 5, 2020, was 5.82%. As a result of changes in the 2017 Tax Cuts and Jobs Act, interest on a home equity loan is now only tax deductible if the money borrowed is used to “buy, build, or substantially improve the taxpayer’s home that secures the loan” per the IRS.5

　　The biggest potential downside is that the house is the collateral for the loan. The borrower can lose the house in case of default on the loan. The proceeds of a home equity loan can be used for any purpose, but they are often used to upgrade or expand the home.

　　A consumer considering a home-equity loan might keep in mind two lessons from the financial crisis of 2008-2009:

　　Home values can go down as well as up.

　　Jobs are in jeopardy in an economic downturn.

　　Home-Equity Lines of Credit (HELOCs)

　　The home-equity line of credit (HELOC) works like a credit card but uses the home as collateral. A maximum amount of credit is extended to the borrower. A HELOC may be used, repaid, and reused for as long as the account stays open, which is typically 10 to 20 years.

　　Like a regular home-equity loan, the interest may be tax deductible. But unlike a regular home-equity loan, the interest rate is not set at the time the loan is approved. As the borrower may be accessing the money at any time over a period of years, the interest rate is typically variable. It may be pegged to an underlying index, such as the prime rate.

　　Good or Bad News

　　A variable interest rate can be good or bad news. During a period of rising rates, the interest charges on an outstanding balance will increase. A homeowner who borrows money to install a new kitchen and pays it off over a period of years, for instance, may get stuck paying much more in interest than expected, just because the prime rate went up.

　　There's another potential downside. The lines of credit available can be very large, and the introductory rates very attractive. It’s easy for consumers to get in over their heads.

　　Credit Card Cash Advances

　　Credit cards usually include a cash advance feature. Effectively, anyone who has a credit card has a revolving line of cash available at any automatic teller machine (ATM).

　　This is an extremely expensive way to borrow money. To take one example, the interest rate for a cash advance on the Fortiva credit card ranges from 25.74% to 36%, depending on your credit.6 Cash advances also come with a fee, typically equal to 3% to 5% of the advance amount or a $10 minimum. Worse yet, the cash advance goes onto the credit card balance, accruing interest from month to month until it is paid off.

　　Other Sources

　　Cash advances are occasionally available from other sources. Notably, tax-preparation companies may offer advances against an expected Internal Revenue Service (IRS) tax refund. However, unless there’s a dire emergency, there’s no reason to give up part of your tax refund just to get the money a little faster.

　　Small Business Loans

　　Small business loans are available through most banks and through the Small Business Administration (SBA). These are typically sought by people setting up new businesses or expanding established ones.

　　Such loans are granted only after the business owner has submitted a formal business plan for review. The terms of the loan usually include a personal guarantee, meaning that the business owner’s personal assets serve as collateral against default on repayment. Such loans usually are extended for periods of five to 25 years. Interest rates are sometimes negotiable.

　　The small business loan has proved indispensable for many, if not most, fledgling businesses. However, creating a business plan and getting it approved can be arduous. The SBA has a wealth of resources both online and locally to help get businesses launched.

　　Types of loans

　　When you get a loan, you borrow a certain amount of money and agree to a set repayment schedule. Loan repayments are typically more predictable than credit cards, which can make them easier to budget for – although their rates may be higher for borrowing small amounts.

　　There are several different types of loan, each with their own risks and benefits – it's important to know which type suits you before you apply.

　　We'll help you understand the main types of loan, and show you where to find more information about them:

　　Personal (unsecured) loans

　　Personal loans allow you to borrow relatively small amounts, e.g. £1,000, although they can go much higher. Many people use them to spread the cost of a large purchases. You won't have to use an asset (such as your house) as collateral, which means less risk for you. However, you'll probably need a high credit score to get a good interest rate.

　　Find out more about personal loans

　　Secured loans

　　These loans use an asset, such as your home or car, as collateral – meaning you could lose the asset if you can't keep up with repayments. But a secured loan can still be suitable if you're confident you can stick to the payment schedule. Collateral lowers risk for the lender, so you may be able to get better rates or higher amounts with a secured loan – even if your credit score's low.

　　Find out more about secured loans

　　Guarantor loans

　　These loans require you to have a guarantor: someone who promises to repay the loan if you can't. This is usually an older relative or friend, although it can be almost anyone who meets the lender's criteria. These loans carry risk for both the guarantor and borrower – but if you have a low credit score, using a guarantor can improve your chances of acceptance.

　　Find out more about guarantor loans

　　Car finance loans

　　Need to spread the cost of your new wheels? There are several ways you can finance a car, whether you want to buy it outright, pay for it in instalments, or just rent it. Each option has different pros and cons, so there's a lot to consider before you apply.

　　Find out more about car finance

　　With Experian, you can compare loans from a variety of companies. Plus, you'll see your eligibility rating for personal loans, helping you understand your chances of approval before you apply.

　　Just remember, we're not a lender, we're a credit broker for cards and personal, car and guarantor loans, working with a selection of lenders and brokers.† This means we don't provide credit, but we can help you find and compare different offers all in one place.