Personal Loan Options: Types, Uses & What to Avoid

Personal loans come in more flavors than most borrowers realize — from straightforward unsecured installment loans to secured (collateral-backed) options, credit union products, and specialty loans aimed at credit-building or debt consolidation. At their core, personal loans are closed-end installment loans: you borrow a lump sum and pay it back in equal monthly installments until the balance reaches $0. The clean, apples-to-apples way to compare them is the APR, which includes the interest rate and required fees (such as an origination fee).

In 2025, the bank average for 24-month personal loans sits in the low-teens — about 11.57% in May 2025 — while the prime rate is around 7.25% after the Federal Reserve’s September rate cut. That is useful context, but your APR depends far more on your credit, income, and debt-to-income ratio (DTI) than on prime alone. Credit unions continue to be compelling for many profiles; federal credit unions operate under an 18% loan-rate ceiling on most loans, currently extended through March 10, 2026.

Unsecured Personal Loans (Most Common): How They Work and When They Fit

An unsecured personal loan is the default option for many borrowers: a fixed-payment, fixed-term installment loan with no collateral required. You receive a lump sum and repay it in equal monthly installments. The schedule — number of months and payment amount — is set at origination, which gives predictability you will not get from revolving credit.

Lenders price these loans based on your credit history, income stability, DTI, and the loan term and amount. The crucial number to compare is the APR, because it captures the interest rate and required fees (for example, an origination fee). Late fees and returned-payment fees are common. Prepayment penalties are less common but do exist, so check the Truth-in-Lending disclosures for details before you sign.

In 2025, the Federal Reserve’s data show bank averages around the low-teens for 24-month personal loans, but marketplace and online lenders can be above or below that depending on your profile and term (36–60-month loans often price differently). Good uses include debt consolidation (when the new APR is materially lower than your card rates and you freeze card spending), defined medical or relocation costs, and larger purchases where a fixed payoff is better than carrying revolving balances.

Unsecured personal loans are a poor fit for covering recurring budget deficits (you risk layering new debt on top of old) or consolidating at a higher APR than your current rates. Start by pre-qualifying (soft pull) with a few lenders on the same day, then compare APR, monthly payment, and total of payments side by side before you apply.

Secured & “Credit-Builder” Options: Share-/CD-Secured Loans and Co-Signers

When credit is thin or bruised — or when you want the lowest possible rate — secured options can help. A share-secured or CD-secured personal loan uses your own savings or certificate as collateral. The institution “freezes” an equal amount while you repay, and the funds typically continue earning dividends or interest.

Because the lender’s risk is lower, APRs on these loans are often far below unsecured personal-loan pricing. Many credit unions price deposit-secured loans at a small spread over the savings or CD rate. These loans can also help you build or re-establish credit because payments are reported as an installment trade line.

A related tool is the credit builder loan (CBL), which flips the sequence: the lender places the loan amount in a locked account and releases it only after you make payments. CFPB-funded research finds that CBLs can help consumers without a score establish one and can improve scores for people who do not currently have any installment debt.

Another way to reduce pricing or improve approval odds is adding a co-signer with strong credit. This can lower APRs — but the co-signer is equally liable, and missed payments will hurt both people’s credit. If you already keep savings at a credit union, ask for its deposit-secured pricing. Rate sheets often show fixed spreads above deposit yields and terms up to 60–120 months, which makes it easy to see the cost advantage.

Rule of thumb: if you have savings you will not need immediately, deposit-secured borrowing can be one of the cheapest ways to bridge a short-term need while strengthening your credit file.

Debt Consolidation Loans: When They Save Money (and When They Don’t)

A debt consolidation loan is simply a personal loan used to pay off higher-APR revolving balances, usually credit cards. It works when the new APR is meaningfully lower and you pair the loan with a strict spend-freeze so balances do not re-accumulate.

The clean comparison is: if your cards carry APRs in the 20s (common in recent years), replacing them with a fixed-rate installment in the low-teens can cut interest and give you a firm payoff date. Some lenders will even pay card creditors directly — ask for this to reduce temptation and keep the loan’s purpose clear.

What does not work: consolidating at a similar or higher APR, stretching the term so long that total interest paid increases, or leaving cards open and active without a plan. Also beware of marketing that blurs the line between legitimate consolidation loans and “debt settlement”. Many settlement firms instruct you to stop paying creditors while they attempt to negotiate. Late fees, penalty interest, collections, and lawsuits are common outcomes, and not all debts are successfully settled.

If you are already struggling, talk first to a nonprofit credit counselor and evaluate a Debt Management Plan (DMP). The CFPB’s guidance clearly explains how DMPs differ from settlement programs and what risks you take with each approach.

Medical Financing, BNPL, and Point-of-Sale Loans: Use Carefully (or Skip)

Hospitals, clinics, and dental offices increasingly promote medical credit cards and third-party installment loans at the point of service. Many use deferred-interest promotions that are widely misunderstood: if you do not pay the balance in full by the promo end date, interest can be charged retroactively on the entire original amount, often at very high rates. The CFPB has warned about these products and highlighted how they can increase costs and complicate billing and collections.

Separately, Buy Now, Pay Later (BNPL) plans may look low-cost up front, but regulators are increasingly treating digital BNPL user accounts as a form of credit card under parts of Regulation Z, with an emphasis on dispute rights, refunds, and billing statements. Supervisory reports also flag risks from BNPL loan stacking and limited reporting to credit bureaus.

In practice, for medical bills, ask your provider for a direct, zero- or low-interest payment plan before accepting a third-party medical card. For retail purchases, treat BNPL as credit: limit yourself to one plan at a time, calendar every due date, and avoid stacking multiple offers across apps. If you need installment credit for a non-medical purchase, a plain-vanilla personal loan — priced by APR, not marketing — often gives clearer terms and more predictable protections.

What to Avoid (and Safer Alternatives)

Some “options” are best left alone. Debt-settlement companies often tell you to stop paying creditors while they negotiate. Fees and penalties pile up, collections escalate, and you may still not settle every debt, leaving lasting credit damage.

Advance-fee loan scams use ads promising “guaranteed approval” or “no credit checks,” then ask for money up front or unusual payment methods. Legitimate lenders disclose fees in writing, reflect them in APR, and do not require you to send money just to “unlock” a loan.

You should also be careful with medical credit cards and deferred-interest promotions for healthcare. Retroactive interest and confusing terms are common complaints. And if you are a servicemember or covered dependent, you have specific protections: the Military Lending Act (MLA) caps the Military Annual Percentage Rate (MAPR) at 36% on most covered consumer loans and includes certain fees in that calculation. If a lender cannot or will not comply, they should not be lending to you at all.

Safer alternatives include negotiating directly with creditors, exploring nonprofit credit counseling and DMPs, or — when you must borrow — using a transparent personal loan (preferably with no prepayment penalty) or a credit-union deposit-secured product that fits your budget.

How to Shop (Step-by-Step) and Actually Pick the Best Offer

First, define the job (for example, “consolidate $9,200 across three cards”) and the monthly payment you can afford without strain. Second, pull your credit reports and clean up factual errors; set autopay minimums on all accounts to avoid accidental lates while you shop. Third, get same-day soft-pull quotes from at least two lenders (bank or fintech) and a credit union. Record the APR, monthly payment, and total of payments for the same amount and term.

Fourth, prefer loans with no prepayment penalty. If two APRs are close, this feature is the tie-breaker because it lets you pay ahead without fees. Fifth, if your quotes are high, consider a share-/CD-secured loan to bring the APR down and build payment history. Many credit unions publish rate sheets that show how these loans track a small spread above deposit yields.

Sixth, never pay “expedite” or “application” fees outside the normal disclosed costs — and never send money to “unlock” a loan. Seventh, if you are active-duty military or a covered dependent, verify MLA compliance and make sure the MAPR stays under 36% (MAPR includes certain fees that APR alone may not).

Finally, if the goal is consolidation, ask for direct pay to card issuers and put your cards in the sock drawer until your installment loan hits $0. These steps are not glamorous, but they save far more money than any trick or “hack” you might see in marketing.