What Is a Personal Loan?
A personal loan is a type of installment loan where you borrow a lump sum of money from a lender and repay it in fixed monthly payments over a set period.
Most personal loans are unsecured, meaning you don't need to put up any collateral to qualify. In exchange for that flexibility, they tend to come with higher interest rates. The upside? Your payments stay predictable from month to month.
Common Uses for Personal Loans
If you’re wondering what to know about personal loans before taking one out, here are some common uses! Personal loans are pretty versatile. A personal loan for debt consolidation is one of the most common and popular uses. This allows you to roll multiple debts into a single monthly payment with a potentially lower interest rate. It simplifies things and can save you money in the long run.
Home renovations are another common reason people turn to personal loans. Projects have a way of costing more than expected, and a personal loan lets you get the work done now and pay for it over time.
Medical expenses work the same way. Whether it's a planned procedure or something that came out of nowhere, a personal loan can take the financial pressure off so you can focus on what matters.
And then there are life's bigger moments; a wedding, a cross-country move, an unexpected emergency. A personal loan can give you the breathing room to handle it without draining your savings.
How Personal Loans Work
The process is pretty straightforward. You borrow a set amount from a lender, and they give you specific terms: the loan amount, your repayment timeline, and your interest rate. Once you're approved, the funds are deposited into your account, and you start making monthly payments until it's paid off.
Not sure how much you need or which type of loan fits your situation? That's what loan specialists are for. It's worth having that conversation before you commit to anything.
Types of Personal Loans to Know About
So you know you need a loan, but what to know about personal loans and where should you even start? Talk with specialists at your local First Western bank to decide which type of loan would best suit your financial needs.
Secured Personal Loans
A secured loan requires collateral to back the loan. Because there's something on the line, you may qualify for a lower interest rate or a higher loan amount. Just keep in mind that if you're unable to repay, the lender can claim that asset.
This type of loan is valuable for several reasons. With collateral as part of the equation, approval may be easier, even with a lower credit score. You may also have lower interest rates and higher borrowing limits, allowing for a larger loan amount.
Unsecured Personal Loans
An unsecured loan is very similar to a secured loan, but does not require collateral. Instead, once approved, you’re given the money to repay in monthly payments over the set term period. This loan is approved based on a few factors such as income, credit score and credit history. Because there is no collateral, interest rates might be higher.
This type of loan is appealing because monthly payments are predictable and many lenders will fund you within a few days.
Fixed-Rate vs Variable-Rate Loans
With a fixed-rate loan, your interest rate stays the same for the life of the loan. Payments are consistent and easy to plan around, though the starting rate may be slightly higher.
A variable-rate loan is one with an interest rate that changes with the market. Also called an adjustable-rate loan, interest rates may start lower and vary over time. This may be a popular option for better savings, if interest rates fall, since your rates will adjust accordingly. However, the monthly payments may be higher and long-term costs are more difficult to predict, this type of interest rate is commonly used for credit cards, adjustable-rate mortgages (ARMs), and some lines of credit.
What Lenders Look at When Reviewing a Personal Loan Application
Credit History and Credit Score
Your credit is one of the most important things to consider when applying for a personal loan because it gives lenders a snapshot of how fiscally responsible you are. Your credit score determines the likelihood of you easily repaying a loan and is important for lenders.
Similarly, credit history shows your lender how you manage credit over time. A history of on-time payments is a positive factor for loan approval.
Income and Employment
Lenders want to know that you have a reliable income to support the loan payments. Proof of stable, consistent employment (both current and past) strengthens your application. Frequent job changes won't automatically disqualify you, but steady income is always a plus.
Debt-to-Income Ratio
Your debt-to-income ratio (DTI) shows the lender a comparison of your monthly debt obligations to your monthly income. The DTI required varies by lender. A DTI below 41% is ideal for approval at First Western. A lower ratio shows a sufficient income to support monthly payments for a new loan.
When a Personal Loan Might (or Might Not) Make Sense
A personal loan isn't always the right tool for every situation. Before you apply, it's worth talking through your goals with a lender who can help you figure out what to know about personal loans in your specific case, or if there's a better option for what you're trying to accomplish.
Questions to Ask Before Taking Out a Personal Loan
Before going through with the personal loan, ask yourself a few clarifying questions to be sure you’re making the right decision.
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How much money do I need? It’s wise to go into the process with an amount in mind. Borrowing more than the original amount may increase interest rates or fees.
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Why am I taking out this loan? Make sure you’ve considered other options that may be a better fit for your situation.
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What is the APR (annual percentage rate)? This will include interest rates and most fees, giving you an accurate idea of the true loan amount.
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What are the monthly payments? Make sure the monthly payments are manageable and within your budget. You may also consider any income changes that may affect this during the loan term.
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Are there any fees? Similar to the APR, find out what other costs go into the loan to get a better understanding of what you’re paying.
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Is the interest rate fixed or variable? Depending on your financial situation, one of these options may be more optimal for you.
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Secured or unsecured? Both types of loans are beneficial for different reasons, which works best for you?
Final Thoughts: Making an Informed Personal Loan Decision
Still weighing your options? That's completely normal. The community lenders at First Western are here to walk you through everything, answer your questions, and help you find the loan that actually fits your life.
**All loans are subject to credit approval. Terms, conditions, and eligibility requirements vary. This content is for informational purposes only and does not constitute financial advice or a guarantee of loan approval or funding timelines.