Facing an unexpected expense and not sure how to pay for it? Looking for a way to finance an upcoming expenditure? Want to avoid putting another large purchase on your high-interest credit card? You may be considering using a personal loan as a lower-interest option to help you cover your expenses while maintaining your other monthly financial commitments.
Personal loans can be a useful financial tool to address a variety of lending needs—though they aren’t always the best option available to you. This post will explain the ins and outs of personal loans including how to take out a personal loan, in what circumstances they may best be used, as well as possible alternatives to save you even more on interest or better match your lending needs.
What is a Personal Loan?
While many types of loans are designed with a specific purpose in mind, from home mortgages to vehicle loans, personal loans are general loan products. You can use them for a variety of purposes, though common usages include:
- Emergency repairs for your home or car
- Unexpected expenses like medical bills
- Debt consolidation
- Large purchases including consumer products and vehicles
- Large expenditures including weddings or vacations
Personal loans usually have a fixed interest rate and fixed term lengths. You will have a set monthly payment that you make for the life of the loan. Some personal loans have fees if you pay them off early, while others do not.
Additionally, personal loans can be both secured or unsecured. When a loan is secured, an asset (often the item you are purchasing with the loan) acts as collateral for the bank. If you fail to make payments, that asset could be taken as a last resort to settle the debt. Other items that can be used to secure a loan include property, bank accounts or certificates of deposit, and valuables. So what is an unsecured personal loan? The main difference is that unsecured loans do not have any collateral. They are deemed slightly more risky for banks because of this, and interest rates could be higher as a result.
How do Personal Loans work?
As we mentioned above, personal loans have fixed interest rates and repayment terms. When you apply for your loan, you’ll qualify for a specific interest rate based on your credit worthiness, the length of the term you choose, and any possible collateral.
Your lender will work with you to determine a term length that best aligns with your financial needs, considering an affordable maximum monthly payment amount to help determine how long your loan term will last. You’ll pay this same amount for the entire duration of your loan. Typical term lengths last 1 to 5 years, though some may be longer.
Your interest rate is the percentage of the total loan amount your lender charges you to finance the loan. It’s usually expressed as an APR (Annual Percentage Rate), which is the ratio of the total yearly interest you pay to the balance of the loan. Because your interest rate is fixed with a personal loan, your interest rate will never change (like credit cards often do), despite changes in market conditions, meaning your monthly payment amount won’t go up or down. In times when interest rates fluctuate regularly, knowing that your payments are stable can give you peace of mind.
Personal loans aren’t the only options you have for consumer financing. For smaller ongoing expenses, a revolving credit account like a Personal Credit Card or Home Equity Line of Credit might make more sense. Credit cards are great tools to build credit and cover pop-up expenses that you will be able to pay off within the month (or shortly thereafter)—but because of high interest rates, your balance can grow quickly with interest fees. Home equity lines of credit, which function much like a credit card, are secured by your home, have lower interest rates, and you may be able to have access to a higher borrowing limit.
For larger expenses like home repairs or vehicle purchases, you may consider a home equity loan or vehicle loan. These loans are secured by your home or your car purchase. Like personal loans, home equity loans can be used for any purpose, though if you use them to make improvements to your home you might be able to take advantage of tax benefits on the interest that you pay.
How do you take out a Personal Loan?
Now that you know what they are, you may be wondering how to get a personal loan. Personal loans require an application, like all traditional lending products, where you exhibit you are willing and able to pay for the loan through financial records. You will need to have sufficient income (after your other monthly debts) to cover payments and solid credit. The better your credit, the lower your interest rate will be, though it’s possible to get a loan without perfect credit.
When you are ready to apply, you’ll need to have the following items:
- All income information in the form of recent pay stubs or invoices, tax returns and other tax forms, social security payments, and investment account dividend payout statements
- Bank and investment account statements that show account balances
- Loan and credit card statements that show all your debts
- Two identification materials including one unexpired photo ID: Social Security card, birth certificate, certificate of citizenship, driver's license or state-issued ID, military ID, or passport.
Additionally, if you are hoping to secure the loan with an asset, bring documentation with you that exhibits the asset’s value and your ownership of the item (for instance, a bond certificate or vehicle title). For valuables, reach out to your lender first to determine if the item can be used as collateral and what specific documentation you will need.
Keep in mind you may be able to pre-qualify for a loan before you officially apply, self-reporting your income and debts to your lender to get a better idea of the total loan amount and interest rate you may qualify for. This is useful if you are shopping around for a specific item (like a car) and need help setting your budget based on the loan amount you qualify for. Prequalification is also helpful in helping you make a smart financial decision if you are considering more than one loan product.
You can begin (and often complete) the application process online through an online application portal. To apply for a loan through JSB, visit our Loan Application page.
Ready to apply for a Personal Loan?
Personal loans can be a valuable financing tool to cover a variety of expenses, allowing you to keep your monthly budget balanced while avoiding the often higher interest rates associated with credit cards.
At Jefferson Security Bank, we offer secured and unsecured personal loans with competitive interest rates. To learn more about our offerings, visit our Personal & Vehicle Loans page or reach out to an experienced lending team member. And when you’re ready to apply, you can do so from the convenience of your own home with our online loan application.
With branches in Shepherdstown, Martinsburg, Charles Town, Inwood, and Sharpsburg, we’re proud to be your trusted community lender. Visit one of our local West Virginia or Maryland locations to see how we can help you with your financing needs!