A Guide to the Different Types of Personal Loans Available

Personal loans come in various forms, catering to diverse borrower needs. Beyond the traditional secured and unsecured loans, banks and NBFCs offer several other categories. 

Go through this blog to understand the different types of personal loans and discover the best fit for your financial requirements. 

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Personal Loans Based on the Nature of Loan

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Here are the types of personal loans based on the nature of the loan:

• Secured Personal Loan

‍Secured loans require borrowers to provide collateral, which acts as security for the loan amount. Collateral can include assets like a home, car, or other valuable property. 

If the borrower fails to repay the loan as per the agreed terms, the lender has the right to seize the collateral to recover the outstanding amount.

As the lender can seize the collateral to offset the loan amount in case of default by the borrower, the interest rate is usually lower compared to unsecured personal loans.  

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• Unsecured Personal Loan

Unsecured loans do not require collateral, which is why they usually come with higher interest rates than secured loans. 

Lenders evaluate the borrower's creditworthiness, considering factors like income, employment status, and employer, to assess their repayment capacity before approving this type of loan.

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Personal Loans Based on the Number of People Taking the Loan

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Personal loans can also be categorised based on the number of borrowers involved. Let us explore them in detail: 

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• Cosigned Loan

If a borrower is ineligible for a personal loan alone, a lender might allow a cosigned loan with a creditworthy cosigner. 

While the cosigner cannot access the disbursed funds, they must agree to take responsibility for repaying the loan if the borrower defaults.

The cosigner has to repay based on his income capacity alone. Notably, if both the borrower and the cosigner fail to pay back, the credit score for both individuals will decrease. 

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• Joint Loans

A joint loan involves two borrowers who can both access the disbursed funds and share equal responsibility for repaying the loan. 

Lenders assess eligibility for joint loans by considering the creditworthiness of both applicants. 

Therefore, you and your co-borrower must maintain a strong credit score to qualify for such a loan.

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Personal Loans Based on Interest Rate

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Here are the types of personal loans based on interest rate:

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• Fixed Rate Loans

In a fixed-rate loan, the interest rate is declared at the time of taking the loan and remains unchanged for the entire loan tenure. 

As a result, borrowers have to pay the same EMI (Equated Monthly Instalment) every month, wherein a portion goes to the principal repayment while another portion goes to interest payments. 

The fixed rate helps borrowers with seamless budgeting and financial planning.

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• Variable Rate Loans

In a variable-rate loan, the interest rate is subject to fluctuations based on changing market conditions. 

While it might offer a lower annual percentage rate (APR) than fixed-rate loans, borrowers might face challenges if the interest rate increases. 

To plan your finances, you can choose a shorter tenure to pay fluctuating interest for a limited duration. 

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Other Types of Personal Loans 

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Besides personal loans that are classified by their nature, interest rates or number of borrowers, there are additional types of personal loans frequently opted for by individuals. Take a look:

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• Buy Now, Pay Later Loans

Buy now pay later loans allow purchasers to pay the price of commodities in equal instalments in specified weeks or months. 

This helps purchasers buy the product or service immediately while arranging funds to pay for it later. 

Usually, mobile applications and e-commerce platforms offer this type of loan after a soft credit check. 

The purchaser's ability to pay back based on their income makes them eligible for this loan. 

Ensure you repay this loan within the specified time limit to avoid an adverse impact on your credit score. 

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• Payday Loans

Payday loans are usually for borrowers with poor credit, wherein the lender charges high fees and interest. 

As a result, if you fail to repay this loan within the debt cycle, the extended loan term would attract a significantly high interest payment on the loan amount.

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• Debt Consolidation Loans

A debt consolidation loan is ideal for borrowers managing multiple high-interest loans. This type of loan allows borrowers to consolidate all their existing debts into a single loan with a lower interest rate. 

This reduces financial burden and increases the savings of a borrower. However, while this approach simplifies loan management, it is important to note that the new loan might come with a significant processing fee that the borrower will need to pay.

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How to Choose the Best Type of Personal Loan in 2025?

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Choosing the right kind of personal loan is crucial for borrowers to manage their finances efficiently and ensure timely repayment. 

Here are some key considerations to help you select the best personal loan option from the various types available:

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1. Compare the Interest Rate

The interest rates for personal loans can vary significantly between banks and NBFCs, even for the same loan amount and tenure. 

It is important to compare rates across different financial institutions to find a lender offering the most competitive rate.

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2. Check the Eligibility Criteria

The eligibility criteria for loans vary based on the lender’s terms and conditions. While certain lenders might offer secured loans, others might offer unsecured loans or other types of personal loans. Ensure you are eligible to apply for loans from the lender you choose. 

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3. Check the Documentation Needs

Although most lenders generally require similar documents, some may request additional paperwork. 

The documentation process further varies based on the lender’s policies. You need to check the documents required and the process for seamless loan disbursal.

4. Choose a Lender Who Offers the Required Amount

Based on the borrower's income, credit score, and employment status, financial institutions offer different loan amounts. 

You should check if your loan from the concerned lender would provide the required funds. 

In case it offers a lower amount, you can consider other financial institutions offering the required amount. 

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5. Compare Fees and Charges

Personal loans are associated with processing fees, prepayment or foreclosure charges, and penalties for late payments, which vary widely across banks and NBFCs. 

It is important to examine these costs thoroughly before applying to avoid any unforeseen expenses.

After comparing and reviewing all the factors, you can choose a type of personal loan that offers the required amount at a competitive interest rate along with minimal documentation and disbursal time. 

Moreover, ensure to check the loan repayment tenure flexibility for your convenience and financial planning. 

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The Bottom Line 

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Banks and NBFCs offer various types of personal loans so that borrowers have the flexibility to choose the option that suits their financial needs. 

In addition, e-commerce platforms provide buy-now-pay-later loans, offering alternatives to traditional personal loans. 

Depending on your specific financial needs and goals, you can select the loan option that best meets your requirements. Check out Jar app to get instant personal loans up to ₹5 lakh today!