While U.S. Economic Confidence has increased since it hit rock bottom in April 2020, it still hasn’t rebounded to pre-pandemic levels. With many people still experiencing financial stress, you may need help paying bills or an essential expense like a new laptop for a homeschooling child. If you’re wondering if a personal loan can help, this article will help you understand how personal loans work and what they can be used for.
What is a personal loan?
Personal loans are usually unsecured by an asset and can be used for just about any non-business expense or purchase. They are term loans, meaning you receive the principal balance of the loan in one upfront payment and make monthly payments for a predetermined loan term. If your personal loan has a fixed interest rate, your monthly payment will remain the same over the life of the loan.
Benefits of a Personal Loan
- May have a lower interest rate than a credit card.
- Predictable monthly payments.
- Can be used to consolidate higher interest debt.
- Flexible, can be used for just about anything, including purchases, expenses/bills, or supplementing lost income.
- Borrow a few hundred dollars or a few thousand dollars, subject to credit approval.
- One stable monthly payment is easier to manage and budget for
Drawbacks of a Personal Loan
- May have a higher interest rate than secured loans
- Make sure you understand any fees and penalties associated with the loan
- Higher monthly payment than with a credit card
- Could increase debt if you use it to pay off credit cards, then rack up a balance again
As with any type of debt, you want to use personal loans responsibly by not applying for more than you can afford to pay back and using your loan only for what you intended.
Types of Personal Loans
Now that you understand what personal loans are and the potential benefits and drawbacks they offer, let’s take a closer look at the different types of personal loans.
Unsecured Personal Loan
This is the most common type of personal loan. Unsecured personal loans are not backed by collateral, such as a savings account or physical asset. Approval is based solely on factors like your credit score and history, debt-to-income ratio, and ability to repay.
Secured Personal Loan
If you can’t qualify for an unsecured personal loan, you may be able to use a savings account or Certificate of Deposit to secure your personal loan. Another option is to have a co-signer on your loan, meaning an additional applicant with strong credit who will be responsible for the loan in case you default.
Personal Line of Credit
As an alternative to a term loan, a personal line of credit works like a credit card. A line of credit comes with a certain limit that you can borrow up to, repay, and borrow again as needed. You’ll have minimum monthly payments and can access the credit line by writing special checks linked to it or transferring money into your checking account.
What Does a Personal Loan Cover?
Generally, the only time you’ll need to specify a purpose for your personal loan is if you’re planning debt consolidation. In that case, your debt-to-income ratio may be assessed for what it would be after you pay off other debts (student loans, credit card balances, etc.) with the personal loan. Aside from debt consolidation, you can use your personal loan for whatever you wish, including:
- Medical Expenses
- Necessary home repairs (can also be financed with a HELOC or Home Equity Loan if you have enough equity to qualify)
- Helping a loved one who is in need of financial assistance
- Legal fees, such as paying for a divorce
- Moving expenses
- Expensive consumer goods such as laptops, mobile devices, jewelry, appliances, exercise equipment, etc.
Two things you shouldn’t use a personal loan for are buying a new or used vehicle and starting a business. Why not?
- Auto loans are secured by the physical asset of the vehicle, so they may offer a lower interest rate. Learn more about auto loans.
- Business loans are designed specifically for the financing needs of a corporation. Also, it’s best to keep business debt tied to your business instead of your personal finances. Learn more about business loans.
How Do Personal Loans Work?
Applying for and getting a personal loan is similar to a mortgage, in that you want to compare different offers and find a lender you’re comfortable with. While there are plenty of personal loan lenders to choose from, including online-only lenders, we recommend going with a local lender like CS Bank that you can meet in person and discuss your questions and concerns with.
Once you decide on a lender, consider getting prequalified to review the interest rate and other offer details before formally applying and having the inquiry show on your credit report.
Not sure how much you can afford to borrow? Use our personal loan calculator to see the monthly payment breakdown with different loan amounts.
Still have questions? Our CS Bank loan officers in Northwest Arkansas and Cassville, Missouri are always available to answer any questions you may have about the loan itself, terms, fees, and/or the lending process.
Ready to apply? The application itself can be completed rather quickly with basic information such as your personal and financial information, proof of employment, and photo ID.
Does a personal loan affect your credit score?
As with any other type of loan or credit, applying for a personal loan will create a “hard inquiry” on your credit report. Too many hard inquiries in a short period of time can lower your credit score, which is why it’s best to get prequalified first if you want to compare more than one loan offer.
Once the loan is active, it could potentially help your credit score by diversifying your mix of accounts and recording a good payment record. If you make a late payment or default on the loan, it will hurt your credit.
Check your credit report and score before you apply to make sure there are no errors and you’re in a strong position. The better your credit score, the better the interest rate you can qualify for.
Learn more about personal loans and apply today!
Locally owned and operated, CS Bank is all about the community. We strive to be the "banking family" that people look for through our superior customer service. To get a personal loan from CS Bank, you can apply online from the comfort and convenience of your home, visit one of our local branches in Northwest Arkansas and Cassville, MO, or contact a lender with questions.