Types of Personal Loans: How to Choose the Right One for You

When you decide to seek financing for a personal purpose, you will find that the lending market offers a wide range of options with different terms, repayment periods and eligibility requirements. Choosing the right product depends on the purpose of the funds, whether collateral is available, and your personal financial circumstances at the time of application.

In this article, we take a closer look at the most common types of personal loans to help you make an informed decision.

What Is a Personal Loan and What Is It Used For?

Personal loans are offered by banks and other licensed lenders to individuals to cover a variety of personal needs. Understanding the main types of loans can help you determine which product best suits your budget and financial goals before signing an agreement with the Bank.

To approve a loan, the Bank assesses your creditworthiness and existing financial obligations to determine whether you can make your repayments regularly. A good credit history and a high credit score increase your chances of receiving a more favourable offer with a lower interest rate.

The different products mainly vary in terms of whether collateral is required, the specific purpose of the financing, and how the funds are drawn down and repaid.

Unsecured Personal Loans

An unsecured personal loan is the most common type of financing for individuals, as it does not require you to pledge assets or provide any other form of security to the Bank.

At iBank, the maximum loan amount is up to EUR 30,000, with repayment terms ranging from 12 to 120 months and approval within 24 hours of submitting your application. You can also apply for a loan entirely online, without having to visit a branch. The Bank does not charge fees for risk assessment, loan processing, renegotiation of terms or early repayment.

With this type of loan, the specific offer you receive depends largely on your income, employment stability and previous credit history. That is why it is advisable to keep up with your existing loan repayments before applying for a new personal loan.

Secured Personal Loans

A personal loan secured by a cash deposit offers a lower interest rate and a higher maximum loan amount compared to an unsecured loan, as the Bank assumes significantly less risk when granting this type of financing. With products of this kind, you may be able to borrow up to 90% of the value of the deposit pledged as collateral, with a repayment term of up to 120 months and a fixed interest rate throughout the entire period.

This type of financing is suitable for people who have savings but do not wish to use them entirely. Instead, they can use their savings as security in exchange for more favourable loan terms. It is important to bear in mind that if you fail to repay the loan, the Bank is entitled to use the pledged amount to cover the outstanding debt.

In addition to cash deposits, other assets may sometimes be accepted as collateral. However, for individual borrowers, securing a loan with a deposit held at the same bank remains the most common option. This allows borrowers to benefit from predictable and stable terms throughout the loan agreement, without the risk of interest rate changes due to fluctuations in a variable benchmark rate.

Purpose-Specific Personal Loans

A purpose-specific loan is granted for a particular purpose declared in advance, such as purchasing a car or household appliances, or renovating a home. When financing vehicle purchases, many banks offer dedicated loans known as car loans, where the terms often depend on whether the vehicle is new or used.

Purpose-specific financing should not be confused with mortgage loans, which are secured by a mortgage over real estate and are generally treated as a separate category due to their longer repayment terms and lower interest rates compared to personal loan products. The choice between the two options depends mainly on the amount of financing required and whether suitable collateral is available.

The main advantage of a purpose-specific loan is that the Bank can often offer more favourable terms because it knows exactly how the funds will be used and can assess the risk of the transaction more accurately. In return, borrowers are generally required to provide documentation proving that the funds have been used for their stated purpose.

Non-Purpose-Specific Personal Loans

Non-purpose-specific loans offer complete freedom in how the funds are used, as the Bank does not require borrowers to provide proof of how the loan amount will be spent. This makes them suitable for a wide range of personal needs, from travel and education to unexpected expenses, without additional documentation relating to a specific purpose.

For individual borrowers, non-purpose-specific personal loans remain a preferred option precisely because of their flexibility and simpler application process.

Short-Term Personal Loans

Short-term loans, including products commonly known as payday loans, are primarily offered by non-bank financial institutions. They are characterised by fast approval, but also by significantly higher costs compared to bank loan products.

As a rule, the Consumer Credit Act sets a maximum limit on the Annual Percentage Rate of Charge (APRC) for consumer loans. Any agreement exceeding this limit is considered null and void, protecting borrowers against excessive borrowing costs.

Before choosing this type of product for the sake of faster approval, it is worth comparing the total amount you will have to repay with that of a standard bank loan, even if the latter takes a few more days to process. The difference in the overall cost can often be significant, particularly over longer repayment periods.

Revolving Personal Credit

A typical example of revolving credit is an overdraft facility linked to your current account. It allows you to access funds whenever you need them, without having to withdraw the entire available amount at once. Interest is charged only on the amount actually used, and once repaid, that amount becomes available again, up to the pre-approved limit.

Credit cards also operate on a revolving basis, providing a credit limit that can be used repeatedly and is restored as the outstanding balance is repaid. These products are convenient when you need access to funds for a short period, for example, until your next payday. However, they are not intended to finance larger, planned purchases.

With both products, it is important to keep a close eye on the amount you use, as easy access to additional funds can sometimes lead to a build-up of debt that becomes more difficult to repay than initially expected.

Debt Consolidation Loans

If you already have several active loans with different instalments and interest rates, a debt consolidation loan can simplify their management by combining them into a single, more manageable monthly payment, with one repayment schedule and potentially a lower overall cost. This can be a convenient solution when your existing credit commitments begin to place significant pressure on your monthly budget.

Loan refinancing is a similar option that allows you to transfer an existing loan to new, more favourable terms, particularly if market interest rates have fallen since you originally applied. Before taking this step, compare the costs of early repayment of your existing loan with the actual savings offered by the new financing arrangement.

Personal Loans for Specific Groups of Borrowers

The Bank offers specialised products for specific groups of borrowers, including loans for students, PhD students and pensioners, tailored to their particular income levels and personal circumstances.

Student loans under the Student and PhD Student Credit Act (ZKSD) are backed by a state guarantee and do not require students to provide additional collateral.

At iBank, the interest rate on this product is fixed at 3.00% for the entire repayment period. Repayments begin one year after completion of studies, with a repayment term of up to 10 years, in addition to the grace period. Such specialised terms generally offer lower interest rates compared to standard unsecured personal loans.

In addition to student loans, the Bank also offers a loan for pensioners, tailored to their income and age. The maximum loan amount is EUR 12,500, with a repayment term of up to 84 months (7 years), subject to an additional eligibility restriction. Before applying for this specialised product, it is advisable to request detailed information at a Bank branch or through the Bank's website.

How to Choose the Right Personal Loan

Regardless of which type of product you are considering, there are several key factors you should carefully compare to find the offer that best suits your needs.

Pay attention to the following:

• Interest rate – this indicates the basic cost of borrowing, but does not, on its own, reflect all associated costs.
• Fees and commissions – these may include application, account maintenance and potential early repayment fees. Make sure you read the general terms and conditions carefully.
• Repayment term – a longer-term loan reduces the monthly instalment, while a shorter-term loan can help you save on interest over the entire repayment period.

Financial planning – assess in advance how much you can afford to repay each month without putting excessive strain on your budget.
Comparing these factors before applying allows you to choose a product that genuinely matches your financial capabilities.

Frequently Asked Questions

How long does it take to get approval for a personal loan?

Personal loan applications are approved within 24 hours of submission, provided that the applicant has supplied all the required documents.

Can I repay my personal loan early without a fee?

iBank does not charge an early repayment fee on its standard personal loan. The specific terms and conditions for each product are set out in the loan agreement and the Bank's Tariff of Fees and Commissions.

What happens if I miss a loan repayment?

A missed payment generally results in default interest being charged and may negatively affect your credit history, making it more difficult to obtain financing in the future.

If you experience temporary financial difficulties, contact the Bank as soon as possible, before missing a payment. The Bank may be able to offer you a revised repayment plan.