What is a Personal Loan and How Does It Work?

A personal loan can be a great way to access extra money for a big purchase, an unexpected expense, pay bills, or pay off debt at an affordable rate.

In this article, we’ll explain how personal loans work, how to get a personal loan, and things to consider, so you can decide if it is the right choice for you.

A personal loan from Arkansas Federal Credit Union can help you get the funds you need with flexible terms and affordable rates. Apply for a personal loan with Arkansas Federal today.

What is a Personal Loan?

A personal loan is a set amount of money that you borrow and repay over time through fixed monthly payments. You can get a personal loan from a bank, credit union, or other lender. Unlike a credit card, which gives you access to a revolving line of credit, a personal loan gives you the full loan amount as a lump sum payment after you get approved, which you later repay on a set schedule.

A common reason people take out personal loans is to consolidate high-interest debt into one payment. For example, if you have multiple credit cards or loans, you can use a personal loan to pay them off and then make just one monthly payment at a fixed rate, so your payment stays the same each month. Plus, the personal loan will typically have a lower interest rate than credit cards, which can save you money over time on interest payments.

They’re also commonly used to cover large expenses such as home improvement projects, paying bills, vacations, holiday spending, or unexpected emergencies. Personal loans can be used for almost anything, which makes them a popular financing option. 

What is an Unsecured vs. Secured Personal Loan?

Most personal loans are unsecured, meaning they don’t require any collateral. That means that no assets are backing the loan, and you don’t need to use any property to get approved for the loan. 

Secured personal loans, on the other hand, are backed by an asset for collateral. If you don’t make your personal loan payments and you have a secured personal loan, your lender has the right to the collateral to cover the outstanding debt.

Secured personal loans are available, but they aren’t common. Typically, borrowers prefer unsecured loans because they are easier to apply for and don’t require collateral. 

Things to Consider About Personal Loans

While personal loans are a great tool, the right fit depends on your goals and budget. Here are some key things to consider before applying.

Benefits:

• Flexibility in how you use the funds
• Predictable monthly payments
• Usually has lower interest rates than credit cards or other lines of credit
• Access to funds shortly after approval
• It can help improve your credit score if you make your payments on time
• Helpful for consolidating debt¹

Things to Consider:

• Interest rates can be high if you have lower credit
• Increases your debt-to-income (DTI) ratio, which can impact your ability to qualify for future loans
• Funds are distributed as a lump-sum payment, so if you need to increase the loan amount, you would need to apply for a new loan
• Your credit score will go down if you make late payments
• Some personal loans come with application or origination fees 

Understanding how personal loans work can help you get a better understanding of whether a personal loan is the right fit for you. 

How To Get Approved For a Personal Loan

To get a personal loan from a bank, credit union, or other financial institution, you’ll need to apply and get approved. Each lender has a different process for how to apply for a personal loan, though most will consider things like your credit score, income level, and debt-to-income ratio to determine if you will be approved for a personal loan and what terms you’ll be offered. 

Once approved, you’ll review and accept your loan terms. From there, your lender will deposit the full loan amount directly into your bank account, and you’ll make regular scheduled payments until the loan is fully paid off, including interest. 

If you’re worried about how to get a personal loan with bad credit, it’s still possible. You can still get approved with a low credit score, but you may be offered the loan at higher interest rates. The good news is that you can refinance a personal loan later on after you’ve improved your credit score to get a lower interest rate and better terms. 

If you’re interested in a personal loan, it’s worth applying to see what you qualify for, especially if you can apply for free, like with Arkansas Federal. From there, you can decide whether or not a personal loan will make sense for you. With Arkansas Federal, funds can be available in as little as a few hours after applying.

Apply for a Personal Loan with Arkansas Federal  Today

A personal loan can be a smart way to manage your finances, whether you’re consolidating debt, paying bills, handling an unexpected expense, or paying for a large purchase.

With Arkansas Federal, you’ll find personal loans that offer affordable, fixed rates and flexible repayment terms that fit your budget. And with no application fees, fast approvals, and funding ready within hours of approval,¹ getting a personal loan is stress-free. Get started with a personal loan today. Visit one of our local branches, book an appointment, or apply online to see what terms you qualify for