It is an insult, so only use it if you don't mind insulting the person. But yeah, it is a slang expression, but common.

People typically saw it if you don't quite know what is wrong with the person mentally. EXAMPLES: "Did you see the police car chase on the news last night? That guy must have a few screws loose to think he can get away from the cops." "What the heck?! That jerk in front of me cut in line!" said Jerry. "Don't confront him, Jerry. I don't know how he might react to that. He probably has a few screws loose, and I don't want you to cause a scene," responded Jane.

It's a saying which just means that someone is crazy. Person 1: Mike is a very strange person. Person 2: Yea, he might have a few screws loose. Think of it literally. Imagine a machine that has some screws loose. The loose screws would probably cause the machine to not function properly. In this case, the machine is someone's brain.

It would not be an appropriate thing to say about someone suffering from severe mental illness. Instead you should use medical/psychiatric terms. Even ‘insane’ is derogatory.

Yeah It kinda means someone is a little bit crazy and out of their mind like mr jefferson but I feel like older dudes with mental issues generally have a few screws loose.