Installment loans, personal loans, consolidation loans, payday loans..what’s the difference? We here this question time and time again. We decided to set the record straight and provide a simple explanation and guide to the different types of loans and what each means. We have also included some other terms you may run into so you can be fully prepared when going out to get your loan.

A personal loan is exactly that…a loan to a person. In other words, this is not a loan to a business. Personal loans can be used for about anything you want, including debt consolidation.

Debt consolidation loans are typically just personal loans used to consolidate multiple debts into one easy to make payment. These are great when you have a whole bunch of payments to make to various creditors. It gets them off your back and allows you to work with just one lender. Just make sure you use it to pay off your debts as the lender isn’t going to look over your shoulder and make you prove you used the loan for that purpose.

These are short-term loans that act as an advance against your paycheck. Interest rates are generally very, very high…200 percent or more! Borrowers should pay back these loans very quickly as late fees and interest can become staggering. On the flip side, they are very easy to get, which is why they are so popular with consumers who have poor credit histories. Make sure you are working with a reputable payday lender as they have often been associated with overseas scams.

These types of loans typically bring borrowers and lenders together to lend and borrow money. Consumers with money they want to invest essentially become the “lenders.” Borrowers typically get an installment loan with a repayment period of 1-3 years. Prosper(which can be found on this site) is a great example of this type of lending.

This is something the lender can take if you fail to pay back your loan. This can often be a car, your home, jewelry or something value that the lender can sell or liquidate.

A secured loan is one where you pledge collateral in order to get a loan. Since there is collateral to at least fully or partially back up the loan, these loans usually carry lower interest rates.

Unsecured loans require no collateral. These types of loans are more risky for lenders so they are typically smaller than secured loans and have higher interest rates.

Most loans are installment loans such as an auto loan. You borrow a specific amount of money and pay it back according to a set payment schedule. Often in the form of monthly payments over a set period of time.

Note: payments can sometimes change on installment loans if, for example, the interest rate changes or there is an introductory period where the payment or interest rate on the loan is lower.

This is simply the amount of time you have to pay back the loan. As with an installment loan, such as an auto, you will often be given repayment terms of 36-72 months


A credit card is a revolving loan. You are given a line of credit with the option of payment as much as little as you want from month to month. You can pay the minimum monthly amount of the entire balance in full.

The annual percentage rate (APR) is the interest rate expressed as a yearly rate. This can be very helpful when comparing loans. However, it’s not the whole picture. Fees can be equally important, so make sure to read all disclosures before you apply for a loan.

Most people who have gone out to get a loan or whom have been denied for a loan have heard this term used. This is simply the process a lender uses to decide whether you are approved for a loan and how much they are willing to lend. In addition, it may also determine the terms of your loan(APR, Fees, etc). This is often done via computerized algorithms although there are still loans that go through manual underwriting where a person is involved in the underwriting process.

Leave a Reply