Your credit score is one of the most important parts of your personal finances. Your score will affect everything from your ability to get a credit card to the interest rates you pay on loans. 

Many factors go into your credit score, but one that’s often overlooked is called “credit mix”. This refers to the variety of types of credit products you use, and it makes up 10% of your credit score. Here’s everything you need to know about types of debt, credit mix, and how to optimize this aspect of your credit rating. 

Credit mix is a credit scoring factor that refers to the types of debt and credit products that you have. The types of credit you have might include credit cards, installment loans, and retail accounts, which we’ll touch on more below. 

Credit mix is important because lenders like to see that you have been responsible with managing a variety of credit types. In general, if you have a wider variety of debt types in your credit report, your score will be higher. If you have only one type of credit, your score may be lower. 

How Much Does Credit Mix Affect Your Credit Score? 

In the FICO credit scoring model, credit mix makes up 10% of your credit score. The credit scoring factors are:

Payment history - 35% of your credit score

Credit history length - 15% of your credit score

As you can see, credit mix has the smallest overall effect on your score out of any of the factors. Your record of on-time payments and the amounts you owe have a much larger impact on your score.

With that said, credit mix absolutely still affects your score. It may not be the first priority to optimize, but it should definitely be on your radar if you’re looking to improve your credit rating. 

Credit mix is a measure of the types of credit that you are using or have used in the past. To better understand credit mix, we must first understand the different types of credit that are available. There are two broad categories of debt: Revolving credit and installment credit. Here’s what you need to know. 

Revolving credit is a flexible form of credit that allows you to borrow as needed, and repay as needed. It includes credit cards and certain types of lines of credit. 

Instead of a large upfront loan with consistent monthly payments, revolving credit gives you the option to borrow and repay on a recurring basis. In other words, the amount you borrow and repay is flexible, and continually adjusts based on your spending and repayment activity. 

Revolving credit is also flexible in how much you pay. Often there will be a small minimum payment due, with the flexibility to make larger payments to reduce your debt. 

Credit cards allow you to make purchases at stores and online using borrowed money. When you open a credit card, you’ll be given a maximum credit limit — $3,000, for example. This means that you can borrow up to $3,000 using the card. 

If you put $1,000 in charges on the card, your credit limit will decrease to $2,000. If you then make a $500 payment, your credit limit will increase to $2,500. 

On a credit card, a minimum monthly payment will always be required, but it’s generally a very low amount — often only 1 to 2% of your current balance. You can always pay more (which will help you save money on interest), but you aren’t required to pay any more than the minimum payment. 

A line of credit functions similarly to a credit card. You are given a maximum credit limit, and you can borrow up to that limit as needed.

Some lines of credit are secured, meaning that they are backed by the value of an asset you own — like your home. Others are unsecured, meaning that they are not backed by an asset. 

Installment credit includes most standard loans. You borrow a set amount and then make monthly repayments in the same amount every month for the length of the loan. 

You may be able to make extra payments to pay the debt off quicker, but a significant monthly payment will always be needed. You also cannot typically borrow more without applying for a separate loan (unlike revolving credit, where you can continually borrow more as you repay). 

Mortgages are home loans that you borrow to purchase real estate. These are generally very large loans in the hundreds of thousands of dollars, with monthly payments in the thousands of dollars. 

Auto loans are fixed installment loans used to purchase vehicles. They are secured by the value of your vehicle, which means the bank can take ownership of your car if you default on the loan. 

Student loans are taken out to help pay for higher education costs. Most student loans are federal loans, which are funded by the federal government and applied for via the Free Application for Federal Student Aid (FAFSA).  Private loans, on the other hand, work a bit differently and are separate from federal loans. Student loans are not secured by any physical asset. 

Personal loans are generic loans that can be used for a variety of purposes. Borrowers can take out a fixed amount to fund a major purchase, pay down other high-interest debt, or cover a shortfall in their personal budget. Personal loans are generally not secured. 

Improving Your Credit Mix Can Improve Your Credit Score — But It’s Not the Only Way

If you have only one or two types of debt on your credit report, that could be holding your score back a bit. Improving your credit mix may help boost your credit score, but there are many ways to improve your credit without taking on additional debt. 

In most cases, you shouldn’t take out a loan or apply for a new credit card or line of credit  just to boost your credit score. The downsides of taking on additional debt typically outweigh the small boost you might get from improving your credit mix. 

Often, focusing on the bigger factors of your credit score can give you a bigger boost, without taking on more debt. For instance, paying down existing debt can help boost your “amounts owed” credit score factor, which is 30% of your score (compared to 10% for credit mix).

The PayOff Loan™ from Happy Money can help qualified borrowers consolidate credit card debt into a lower-interest personal loan. This can potentially help you pay off your debt faster, reduce interest costs, and boost your credit score. Now that’s a win-win-win! 

Credit mix is a factor that contributes to your credit score. It measures the different types of debt you have, such as revolving credit or installment loans.

How Credit Mix Affects Your Credit Score | Happy Money

Types of Debt: How Credit Mix Affects Your Credit Score

Taking steps toward your goals is always important — and having a way to actually track that progress is equally key. When it comes to your finances, there are many metrics you could look at, but perhaps none are as useful as your net worth.

Net worth is a measure of how much your financial assets are worth, after subtracting any debts you owe. It’s a quick at-a-glance of your overall financial situation. 

This article will discuss how to calculate net worth, the average net worth in America, and how to improve your own net worth with actionable strategies. 

Net worth is the value of all the assets (valuables) you own, minus the liabilities (debts) you owe. Valuables are things like money in your checking account, investments, vehicles, and real estate. Debts are things like credit card debt, mortgages, and student loan debt.

You can think of net worth like this: If you sold all your valuable assets, and then paid off all your debts, how much money would you have? 

For example, consider a scenario where someone has $10,000 in retirement savings, $3,000 in cash savings, and a vehicle worth $9,000. Their assets total $22,000. They also have $3,000 in credit card debt and $5,000 in auto loan debt. Their debts total $8,000. In this scenario, the person’s net worth is $14,000 ($22,000 in assets minus $8,000 in debt). 

What is the average net worth among Americans? According to a 2022 survey, these are the average net worth figures for various generations:

For Generation Z, we don’t have clear data on average net worth. 2019 data from the Federal Reserve lists the average net worth of those under 35 at $76,300. However, this figure includes many millennials, so it’s not an exact measure of Gen Z’s wealth. We do know that Gen Z is stashing away 14% of their income for retirement, which is a higher savings rate than previous generations.

Also, keep in mind that averages tend to be skewed higher by extremely wealthy people. The median net worth may be a more accurate measure of a typical American. 

According to the most recent Federal Reserve data, the median net worth for Americans was:

Net worth calculations are relatively simple. The formula is total assets minus total debts. Before you calculate your own net worth, here’s what you need to know about assets and liabilities. 

Assets are possessions, investments, etc. that are considered valuable. Examples of assets include:

When calculating net worth, you should make a list of all your assets, along with estimated values for each. Many assets already possess a clearly defined value. You can look at your bank account or investment accounts and see the exact cash value on any given day. Other assets may require a bit of research or estimation. The value of real estate, for example, may require research on sites like Redfin or Zillow. 

The value of a coin collection, jewelry, or artwork may require a bit of legwork to determine the approximate value. In some cases, you may need to seek out a professional appraisal. 

Liabilities are debts that are owed to another person or entity. Examples of liabilities include:

To calculate net worth, you need to make a list of all your debts and their current amounts. Liabilities are typically easy to measure, as you can quickly check exactly how much you owe. 

Now that we’ve defined the necessary background information, we can actually calculate our own net worths! Here’s the step-by-step process:

Make a list of all your assets, along with the value of each

Make a list of all your debts, with the current amount of each

Subtract the value of your debts from the value of your assets

Raj sits down to calculate his net worth. He makes a list of all his assets and liabilities, which looks like this:

Net worth is a simple way to measure where you stand financially. If you’re not satisfied with where your net worth stands, how can you take steps to increase it? There are two ways to increase your net worth: Increasing assets or decreasing debt. We’ll cover each in detail below. 

Increasing the value of your assets is key to improving your net worth. Assets can be anything with value, but it’s wise to focus on primary wealth-building assets like investments and real estate. Here are some ideas on how to increase the value of the assets you own:

Save for retirement using tax-advantaged retirement accounts

Accounts like a Roth IRA or a 401(k) provide valuable tax perks if you save for your future. Check with your employer to see if they offer retirement benefits — if not, you can open a retirement account on your own.

Money that is invested in stocks, bonds, and other growth assets can benefit from the magic of compounding interest. You can invest within retirement accounts or in a standard brokerage account. Investing doesn’t have to be risky, either! Series I Bonds, for example, offer a good rate of return with no real risk. 

Owning your own home can help you build wealth because a portion of your mortgage payment goes into home equity. 

An emergency fund is money set aside for unexpected events. It’s an important asset, and it can also help you reduce financial stress and prevent going into debt in case of an emergency. 

Your mindset and approach to personal finances have a big influence on your financial journey. Adopting a savings mindset can help you make more intentional spending and saving decisions, which can really add up over time. 

Debt is the other half of the net worth equation. Taking steps to reduce your debt is vital, and it can benefit you in three ways: 

It lowers your monthly expenses by eliminating debt payments

It decreases the amount of interest you pay

Here are some ideas to reduce your debt levels:

High-interest debt is the most costly and should be the first priority when it comes to reducing debt. Credit card debt, for example, often carries interest rates of 20% or more, making it extremely costly.

Refinancing debt is a way to combine debts and ideally lower the interest rate you pay. For example, the Payoff Loan™ from Happy Money helps people with credit card debt pay it off faster with a lower-interest personal loan. 

Saving for the future is important, but in some cases, paying off debt should be a higher priority. For example, if you have credit card debt at a 22% APR, there’s not much benefit in saving in a savings account that earns 1% interest. For long-term financial success, focusing your efforts on paying off higher-interest debt should be your approach. 

Your credit score influences the interest rates you pay on certain loans, and can also affect your ability to refinance. Focusing on making on-time payments on all your debts is one way to boost your credit score. 

Budgeting can be a useful tool to help pay off debt faster. Budgeting allows you to intentionally plan out your spending, and prioritize the categories that are most important. To pay off debt faster, consider reducing your budget for optional expenses, and funneling that money towards higher debt payments. 

Your net worth is your total assets (valuables) minus your total liabilities (debts). Here’s how to know where you stand.

How Do You Calculate Net Worth? | Happy Money

Like it or not, money plays a huge role in all of our lives. Our finances shape how much we have to work, where we can live, and the things we can enjoy. Our ability to change our financial situation is often limited. But we can always change our relationship to money, which can help foster positive change.

Your “money mindset” is how you think about money. It’s a set of beliefs and attitudes about finances that drive your decisions when it comes to money. Your money mindset shapes the way you feel about your spending decisions, investing, debt, charitable giving, and more. 

A healthy money mindset can help you reduce financial stress, work towards goals, and build a positive financial future. 

Your money mindset is a product of how you were raised, your experiences with money so far in life, and even the type of financial education content you consume. 

We pick up a lot of our habits and attitudes toward money from our families. In fact, research shows that financial habits are formed much earlier in life than you might expect. One study found that many foundational money habits are actually established by age 7. 

But it’s not all family influence. The attitudes we have towards money as an adult are shaped by our experiences, our social circles, and the books we read. And here’s the key to remember: Your money mindset can change. If you feel like you don’t have the healthiest relationship with money, you can start making actionable changes today to reframe your financial mindset.

We’ve established what a money mindset is and why it’s important — but how do we actually create a healthy mindset around our finances? 

Understanding your goals in life — particularly as they relate to money — is a great place to start. Keeping your goals in mind can help you make financial decisions that move you in the right direction. Here are just a few ideas of how your goals could influence your money mindset:

If you have the goal of retiring early, you might prioritize investing over optional spending. Did you know that $100 invested today could potentially be worth over $1,700 in 30 years (assuming 10% average stock market returns)? 

If you have the goal of sending your children to top-tier colleges, you might prioritize saving over spending. 

If you have the goal of supporting charitable causes, you might prioritize donating to charity or supporting your church. 

Personal values also play a role in your money mindset. Here are some examples:

If you value supporting small businesses, you might opt to shop more locally — even if it means spending more.

If you value family, you may prioritize spending on entertainment and fun activities with your family.

If you value your career, you may prioritize self-investment in professional training and networking.

Get Clear on What Matters — And What Doesn’t

It’s easy to get caught up in the little things in life, but in the grand scheme of things, a lot of stuff we worry about simply doesn’t matter very much. This can play out in our finances on a day-to-day basis.

For instance, saving for the future is of course important — but saving every last dollar possible can take a lot of enjoyment out of your life. So do set up that monthly transfer to your retirement account, and don’t worry about the occasional splurge on take-out. 

In your own life, identify what matters to you, and what really doesn’t. Focus your energy on the small percentage that matters most, and you’ll achieve better results. 

Kindness and self-compassion go a long way in every aspect of our lives, and our finances are no different. A healthy money mindset means forgiving yourself for past mistakes, adopting a positive attitude, and looking forward to a brighter future. 

This also means forgiving yourself for little slip-ups throughout your journey. Maybe you set a goal to spend less on restaurant meals, but a stressful week led you to overspend on take-out. You can acknowledge your mistake, take note of how you can prevent it from happening again (meal prep, anyone?) and move on — there’s no need to beat yourself up about it. 

It pays to have big dreams. Maybe you’d love to retire early and travel the world. Or perhaps you’ve always wanted to own your own home and raise a family. Or maybe you want to be a multimillionaire and own a vacation home and a boat.

Whatever your dreams may be, dream them — and then take small, actionable steps toward those dreams. Setting big goals can be intimidating. It’s wise to break them down into smaller chunks so that you can make slow and steady progress. 

Say you want to retire as a millionaire, and you have about 30 years left in your career. Well, saving $1,000,000 sure seems intimidating — but how about $480 per month? Believe it or not, if you have 30 years to invest and you can earn 10% returns in the stock market, saving just $480 per month could potentially result in an ending balance of around $1 million. 

Learning more about personal finance is a great way to improve your money mindset. Whether you choose to read blogs, listen to podcasts, or even watch YouTube videos, there’s plenty of valuable free information out there. 

Ready to start now? Browse The Happy Money blog for insights on paying off debt, budgeting, investing, building credit, and more.

Money can seem like a taboo topic to discuss with others, but openly discussing finances can be part of a healthy money mindset. 

The first place to start is to talk with your partner — not just about day-to-day finances, but about your bigger goals and plans. Talking about money is important to the health of your relationships, and it’s particularly important around key life transitions like getting married. 

Talking with your friends and family about money can also be beneficial. You don’t have to get into specifics, but simple strategies like asking for advice or sharing a small financial win of yours can help start the conversation tactfully. 

Understand the Trade-Offs of Every Spending Decision

A key part of a healthy money mindset is understanding what it actually means to spend money. Consider these facts.

Every dollar you spend is a dollar you can’t spend on something else. 

Every dollar you spend is a dollar you can’t save or invest.  

Every dollar you spend is a dollar you can’t use to pay down debt.

These statements might seem simple, but there is deeper meaning when we pause to think about them. 

If we’re trying to pay off debt, each optional purchase we make delays that goal. If we’re trying to save for retirement, each purchase slows our progress. That doesn’t mean that we shouldn’t make optional purchases — it simply means that we might want to pause and consider the trade-offs of each of our spending decisions. 

Want a unique way to spend with more intention and adopt a savings mindset? Try out the 30 day rule, which asks you to pause for 30 days before making an unplanned purchase. If you still want the item after 30 days, go ahead and buy it — if not, save the money or use it to pay off debt. 

A healthy money mindset also means being flexible and adapting to changes as they occur. Making plans and setting goals is great, but it’s also important to be willing to change course as needed. This could mean cutting back on spending if you have an unexpected major expense pop up. Or it could mean budgeting more for travel because you recently got a raise. 

In any case, the key is to be flexible and adaptable and to keep the principles of self-compassion and kindness in mind if you do need to change course. 

Healthy Money Mindset = Financial Wellbeing 

Your money mindset is your set of beliefs, strategies, and habits around money and personal finance. Developing a healthy money mindset is key to building a brighter financial future — and helps you find peace with your current situation, wherever you may be on your journey. 

Want to reduce your financial stress, improve mindfulness, and adopt a healthier money mindset? Sign up for Peace by Happy Money. Peace is a science-backed financial mindfulness course delivered straight to your email inbox, for free. When you sign up, you’ll receive a series of stress-reducing skills and insights to help you find peace with your personal finances. 

It can feel like a struggle to save money. Sometimes, getting creative with your strategies can help. If you’ve ever heard of the 30 day rule, you might be wondering just how it works. What is the 30 day rule, and how can you use it to your advantage?

The 30 day rule is pretty simple. Here’s how it works. Any time you are about to make a non-essential purchase, you instead pause for 30 days. 

After the 30 day wait, you can reassess. Do you still want the item or service you were going to purchase? If so, you can buy it guilt-free, knowing that you took the time to think it through. If you no longer want or need to make the purchase, you can simply save that money instead — or use it for something that does align more with your current wants and needs. 

You head out for some back-to-school shopping for your children. You pick out all the essentials — new clothes, school supplies, and whatever else was on your list. And you spot a new pair of earbuds that would be perfect for your workouts. The problem is, new earbuds weren’t on your list. So, you’re looking at an unplanned purchase of a new item for yourself.

With the 30-day rule in mind, you can mindfully pause. You can move forward with the planned purchases for your children and put the optional purchase on the back burner. 

30 days later, if you still want the earbuds, you can return to the store to buy them. You could even set a reminder on your phone to check in after a month. 

The 30 day rule enables you to spend with more intention. By inserting a pause into your optional spending decisions, you can take time to think about what you really want. 

It’s also a way to remove guilt from purchases. We all make unplanned purchases — and that’s totally okay. But if you find yourself feeling guilty after buying something, the 30 day rule might be a good option for you.

After all, if we can have the self-control to wait 30 days before buying something, and we still want it after that wait, then we can fully enjoy that purchase without guilt. 

How to Maximize Your Money Using the 30 Day Rule

The 30 day rule can help you improve your spending habits, which can result in more intentional purchases, more money saved, and less financial stress. But it’s not all about saving money. It’s really about being intentional, and thinking through your spending decisions. Here’s how to maximize your success with the 30 day rule. 

The 30 day rule can be a powerful boost to help you save more money. After pausing for 30 days, you’ll have had time to think about whether you truly want or need that purchase. And in many cases, the answer will be no.

If you decide not to make the purchase, what should you actually do with the money? Well, you have several options:

Use it to pay down debt or invest (see below)

Open a high-yield savings account to earn more interest

You could choose to make small transfers to your savings every time you decide not to make a purchase. Or, you could transfer once a month based on your spending habits for the previous month. 

For an even bigger boost to your personal finances, consider using your new savings to invest or pay down debt. 

Paying off debt should generally be your top priority, particularly if it’s high-interest debt. This can help you save money on interest, lower your total debt, and even improve your credit score. 

Investing for the future should also be a top financial goal. You can start a brokerage account to buy stocks, or contribute money to your workplace retirement account. 

Remember, money can’t buy happiness — so if you truly do want that purchase, and it might bring you joy or satisfaction, be sure to enjoy it guilt-free.

The 30 day rule isn’t about being a stickler and never spending money. It’s just about pausing to intentionally think about your purchases before making them. If after a month of waiting you still want the item or service, go ahead and buy it — and enjoy. 

Spending decisions don’t have to be all-or-nothing. You can also choose to split the difference, so to speak. 

For instance, let’s say you are thinking about buying a new patio furniture set, but you decide to use the 30 day rule to wait it out. After 30 days, you decide that you really do want some outdoor furniture — but you realize that you really only need a few chairs to enjoy your porch. Instead of opting for the expensive set, you can choose to purchase some inexpensive chairs — and save the rest of the money for a rainy day. 

If you’re on the fence, you can simply keep the money in a sinking fund. You can later use the money to make the purchase, or repurpose it for one of your other financial goals (like paying off debt or saving for retirement).

See What the 30 Day Savings Rule can do for You

The 30 day rule is a unique approach to spending decisions that can encourage more intentional spending. It can help you develop a savings mindset, while also enjoying the purchases you do make with less guilt. Give it a try and see how it works for you. 

The 30 day rule asks you to pause for one month before making an impulse purchase. Learn how the 30 day rule can give your savings a boost.

What Is the 30 Day Rule for Personal Finance? | Happy Money

What Is the 30 Day Rule for Personal Finance?

We’ve all got bills to pay, and it’s rarely any fun. But did you know that you might be able to negotiate certain bills? 

That’s right — if you have certain strategies in mind, you might be able to lower the cost of certain services, as well as negotiate one-time costs like medical bills. The process depends on the type of bill, but it’s absolutely worth looking into. Here’s how to negotiate bills like a pro. 

It’s possible to attempt to negotiate a wide variety of bills due to the nature of competitors all vying for your business. However, you’re more likely to find success with certain bills, including:

Bundled services (internet, cable, phone)

In addition to these recurring bills, you may be able to negotiate one-time expenses like medical bills. This guide will focus on negotiating recurring bills. 

Once you’ve identified some bills to target in your situation, it’s time to get down to business. In general, negotiating usually starts with a call to the service provider. However, before you start dialing, keep these tips in mind. 

It’s important to do your research ahead of time to prepare for your phone call. Here’s what information you should gather:

What services you are currently paying for

How much you’re using the services (i.e. how much data you’re using per month on your phone)

For example, say you want to negotiate your cable bill. You would first check your account to see how much your monthly bill is, and what services/channels you’re paying for. Then, you’d research competing cable providers in the area to see what their packages cost. You’d take notes on all of this, and use that information in your negotiations. 

The general goal of negotiations is usually either to save money or to pay the same amount for upgraded services. It’s often a good idea to have a rough goal in mind — for instance, maybe you’d like to trim your bill by 20%. 

Taking notes can help you organize your thoughts, both before, during, and after the call. You should start by taking note of your goals and the data you found during your research. You can also jot down notes during your call to have them to review later. 

When you first call in, you’ll be connected with a front-line service representative. This person may or may not be the correct representative to talk to. 

To get redirected to the appropriate department, explain that you’re considering canceling the service. This will typically get you transferred to the “customer retention” department or the sales department, where representatives will usually have more power to negotiate bills. 

Negotiating your bills usually involves talking to someone on the phone. It’s absolutely vital to be friendly, patient and understanding with the customer service representative — even if you don’t get what you want. 

A phone call may or may warrant results in getting you what you want from the negotiations. But in any case, you will find more success by being polite. 

If you are offered a deal, it’s important to understand the specific terms of the agreement. In some cases, agreeing to a new price might lock you into a new contract, or may change the specific services you receive.

For instance, a provider might be willing to lower your rate if you go from a month-to-month agreement to a 12-month contract. While this could save you money, it also locks you in for a longer period of time. Or, the provider might be able to lower your price by cutting out certain services. 

In any case, it’s important to understand what you’re getting into. If you are confused or have any questions, don’t hesitate to ask the customer service representative for details. At the very least, before committing to anything, be sure to have the details of your new terms sent to you in writing. You should be able to request the terms be sent to you via email.

Come In with a Strategy and Know Your Deal Breakers

It’s often effective to politely make it clear that you are willing to cancel the service if you’re not offered a better deal. This can create a sense of urgency for the provider, as they know they might lose you as a customer if they don’t lower your bill. 

It’s also okay to explain that you’re considering canceling the service, even if you’re not seriously considering it. As long as you’re polite and patient, it doesn’t hurt to inform the service about your willingness to leave. 

In some cases, providers won’t be able to offer a discount, but they can instead offer a free upgrade. In this situation, you might be offered things like additional channels or a higher data cap without an increase in your bill.

If you don’t want to negotiate your bills yourself, there are third-party services that can help negotiate on your behalf. Examples include Billshark, Trim, and Billcutterz. 

Usually, all you need to do is upload information about your bills, and authorize the company to negotiate on your behalf. From there, the company attempts to negotiate your bill for you.

These companies charge a fee for the service. This is often a percentage of the savings they can get for you. For example, a company might charge 50% of the annual savings. If they lower your cable bill from $100 to $80, that will save you $240 per year — and the bill negotiation service would take half of it ($120). 

Successfully negotiating a bill can be a satisfying feeling, and it can certainly give your finances a boost. But why stop there? 

If you’re struggling to save money, consider starting a budget to keep your spending in check. If high-interest debt is holding back your finances, make a plan to pay it off. And if you just want to learn more about personal finance, read through the Happy Money blog today.

A surprising number of bills can potentially be negotiated to help you save money. Here’s how to negotiate your bills like a pro.

How to Negotiate Your Bills | Happy Money

Personal loans are versatile loan products that can be used for a variety of reasons, from funding a major purchase to paying down high-interest debt. There are a few different types of personal loans, with two broad categories to consider: Unsecured personal loans and secured personal loans. But what do these terms really mean, and which might be the best fit for your needs? 

A personal loan is a type of installment loan that can be used for any purpose. With a personal loan, you borrow a fixed amount of money upfront, then pay it off over time with consistent monthly payments. 

What you use the loan for is your own choice. You might use it for a home renovation, a major purchase, or even to pay off other types of debt. 

Certain types of personal loans may be designed for specific purposes. For instance, many personal loans are offered as a way to pay off high-interest debt. Others are general purpose loans and can be used for anything. 

To get a personal loan, you must apply for one through a bank or lender. The lender will access your credit report to determine your creditworthiness. They use this data to decide if they’re willing to lend you money — and if so, what interest rate they will charge you. 

Another factor that influences interest rates is whether or not the loan is secured or unsecured. Most are unsecured, but some lenders offer secured loans — potentially at lower interest rates. 

A secured personal loan is a loan that is backed by an asset that you own. You provide collateral — like a vehicle or an investment account (including any eligible stocks, bonds, exchange-traded funds (ETFs), or mutual funds that you may have in your portfolio) — when you get the loan. If you are unable to repay the loan, the lender can legally take possession of the collateral that you used. 

Secured personal loans are not very common. However, some lenders offer them as a way to reduce the risk of lending money — and to be able to offer loans at lower interest rates. 

May be offered at a lower interest rate compared to unsecured loans

Requires ownership of a substantial asset (vehicle, investments, real estate, etc.)

If you default on the loan, the lender can take possession of the collateral you used

An unsecured personal loan is a standard personal loan that is not “secured” by any asset. 

When you apply for an unsecured loan, your approval odds are based only on your credit history. The lender will access your credit report and determine how likely you are to be able to repay the loan, based on your credit history. 

If you end up being unable to repay an unsecured loan, the lender can send your debt to collections, assess penalty fees, and more — but they can’t seize control of your assets. 

No risk of losing an asset if you can’t repay the loan

Widely available from a variety of banks and lenders  

Disadvantages to Unsecured Personal Loans

Harder to get approved for (requires a higher credit rating)

Unsecured vs. Secured Personal Loans Compared

If you’re trying to decide between a secured and an unsecured loan, it’s wise to first consider these factors: 

Availability: In general, unsecured loans are more widely available from standard banks, credit unions, and online lenders. Secured loans are less common.

Collateral requirements: A secured loan requires that you have a valuable asset to put up as collateral. This could be a vehicle, equity in your home, or the value of your investment accounts. Unsecured loans do not require any sort of collateral. 

Interest rates: Generally speaking, interest rates on secured loans will be lower than unsecured loans. This is because secured loans are less risky for the lender, so they are often willing to loan money at a lower interest rate. 

Risk: To the borrower, the risk of a secured loan can be considered higher than with an unsecured loan. If you fail to repay a secured loan, you can damage your credit and lose the asset you put up as collateral. If you fail to repay an unsecured loan, your credit will be damaged — but you won’t lose your assets. 

Ultimately, there’s no clear “best” type of personal loan. It all depends on your specific needs, credit rating, and other factors. 

In any case, it pays to shop around. If you have good credit, it’s a good idea to check to see if you can prequalify for an unsecured personal loan, which will allow you to see your estimated interest rate and monthly payments without affecting your credit. 

A Loan to Help You Reclaim Control of Your Finances

Secured loans are backed by an asset you own, while unsecured loans are solely based on your personal credit. The majority of personal loans are unsecured. 

Personal loans can be “secured” or “unsecured”. But what do these terms mean, and which is a better option for you? Learn more here.

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