A loan can help you pay for the things need when you don’t have the cash, but borrowing money can be complicated. Starting the bank loan application process without understanding the ins and outs can cause your loan request to be rejected. Learn what to expect and what you can do ahead of time to increase the odds of getting approved.
Understand Your Credit
You generally need credit to get a bank loan. In addition, your credit will often dictate the type of loan and loan terms a lender grants you. This means that you should have a history of borrowing and repaying loans to get a loan. How do you get a loan when you need money if you don’t have credit?
You have to start somewhere, and that generally means borrowing less money at higher interest rates. You can also consider alternative lenders such as online lenders, who are often willing to look at aspects of your financial record beyond your credit when deciding whether to grant you a loan. Once you develop a strong credit history, lenders will lend you more—and at lower interest rates.
You can view your credit for free—you get one free report per year from all three major credit reporting agencies: Experian, TransUnion, and Equifax. Review your credit history to see what lenders will see when you ask for a loan. If there’s not much in there, it will generally be harder to get a loan because lenders can’t assess your risk as a borrower. This means you may need to build credit before you obtain a loan by gradually adding loans to your history.
Be sure to fix any mistakes in your credit files, as they make you a risky borrower in the eyes of lenders and hurt your chances of getting a good loan.1
Decide on a Bank Loan Amount
Remember that a loan isn’t free money—you will eventually have to pay the borrowed amount plus interest back to a bank or other lender. If you don’t make loan payments on time, your credit score could drop.2 This is why it’s important to settle on the right borrowing amount.
Consider the amount you need based on what you plan to do with the money. But also factor in what your regular loan payments might be and whether you can keep up with them according to the loan repayment period, be it monthly or quarterly.
It’s also a good idea to run preliminary loan calculations before settling on a loan amount. This allows you to see how much you’ll pay for a loan of a certain amount, and how a different loan amount (or loan term, or interest rate) might save you money. There are plenty of online tools out there to help you calculate loans. Of course, loan rates and lender terms can make your final loan installments slightly different.
Determine the Type of Bank Loan You Need
Next, figure out what type of bank loan you need. The type of loan you get will depend on what you plan to do with the money. Some common loan types include:
Auto loans for buying a vehicle
Home loans (mortgage loans), including second mortgages for buying a home or borrowing against the equity in your home
Personal loans, which can be used for almost any purpose
Business loans for starting or expanding your business
Student loans for educational purposes
Fast loans, which can provide quick cash for emergencies
Some lenders may let you take out a certain type of loan that does not match your specific need for a loan. For example, you can generally take out a personal loan to pay for health, home repair, or other expenses. However, other loan types must be used for a specific purpose. For example, you generally have to use a mortgage loan to buy a home. In addition, you may not be eligible for all types of loans. To get a student loan, for example, you usually have to provide proof of enrollment in a degree program.
Credit scoring algorithms are often customized for certain lenders and for certain loan types, so it benefits you to select a loan type that matches your need for the money.
Decide Where to Borrow Money
Once you have an idea of your credit, loan type, and loan amount, shop around for a lender. The Balance provides lists of the best mortgage lenders and personal loan companies so that you can compare individual lenders.
Again, the type of loan you want may dictate your choice of a lender. Some institutions don’t offer business loans or student loans. Start your search at the institutions best known for making affordable loans of the type you want. For example, go through your school’s Student Aid office for an education loan before you go to the bank for a private student loan.
Banks and credit unions are a good place to shop for most loans. Check with several institutions and compare interest rates and costs. Peer-to-peer loans and other sources of marketplace lending should also be on your list. Online lenders provide another option but stick to reputable sites if you go this route.
Some people borrow money from private lenders, such as friends or family. While that can make approval easier and keep costs low, it can also cause problems. Make sure you put everything in writing so everybody’s on the same page—money can ruin relationships, even if the dollar amounts are small.
Avoid high-cost loans and predatory lenders, who will often dupe you into a loan you don’t qualify for or can’t afford. It’s tempting to take whatever you can get when you’ve been turned down repeatedly and don’t know how else to get a loan for the money you need. However, it’s not worth it—they’ll lend you money, but you’ll find yourself in a hole that’s difficult or impossible to get out of.
Payday loans, which are high-interest short-term loans, tend to be the most expensive options. Likewise, loan sharks, who impose loan repayment terms that are virtually impossible to meet, can be outright dangerous.
There are other kinds of fast loans that can get you money quickly without the triple-digit APRs of payday loans, including payroll advances from your employer and Payday Alternative Loans (PALS) that let you borrow small amounts from credit unions. These lenders can be safer to deal with than storefront payday lenders.
Understand the Loan
Before you get a bank loan, take a look at how the loan works. How will you repay it—monthly or all at once? What are the interest costs? Do you have to repay a certain way (perhaps the lender requires you to pay electronically through your bank account)? Make sure you understand what you’re getting into and how everything will work before you borrow money. It’s also wise to plug the loan terms into a loan calculator again and view an amortization table (whether you build it yourself or let a computer do it for you) so that you can budget for the loan and see how it will get paid off over time.
Get a loan that you can really handle—one that you can comfortably repay and that won’t prevent you from doing other important things (like saving for retirement or having a little fun). Figure out how much of your income will go towards loan repayment—lenders call this a debt to income ratio—and borrow less money if you don’t like what you see. Many lenders want to see a ratio below 36% or so.3
Apply for the Loan
You’re ready to get your bank loan once you’ve:
Spruced up your credit
Settled on a loan amount
Picked the best type of loan
Shopped the competition
Run the numbers
At this point, you can go to your chosen lender and apply. The loan application process is easy to start: Simply tell the lender you want to borrow money, and tell them what you’re going to do with the funds (if required). They will explain the next steps and how long the process will take.
When filling out an application, you’ll provide information about yourself and your finances. For example, you’ll need to bring identification, provide an address and social security number (or equivalent), and supply information about your income.
Before you apply, make sure you can provide proof of a consistent income to boost your odds of being approved for a personal loan. If your income (or credit score) isn’t sufficient, look for a co-signer (a family member, for example) with a higher income and credit score than you have.
Go Through Underwriting
After you submit the bank loan application, the lender will evaluate you as a potential borrower. This process may be instant, or it may take a few weeks. For example, home loans take longer than credit card offers because there’s more at stake. Mortgage loans require extensive documentation, such as bank statements and pay stubs to prove that you have the ability to repay.4 You can make the process easier on yourself by getting everything in order several months before you apply.
During underwriting, lenders will pull your credit (or just use a credit score) and review your application. They may call you occasionally and ask you to clarify or prove something. Be sure to comply with these requests in a timely manner to avoid prolonging the loan application process.
Business loans are similar to any other kind of bank loan. Lenders look for the same basic attributes in business borrowers as they do in people seeking personal loans. However, new businesses don’t have a long borrowing history (or credit). In addition, new enterprises and service businesses typically don’t own assets that can be pledged as collateral, so they have to work a little harder to get loans.
Lenders often look at the borrower’s personal credit and income to determine whether they qualify for a business loan. They may also look at the credit of the business.5 Business owners who don’t have sufficient business credit may also have to pledge personal assets as collateral to get loans. This is often the only way to get loans in the early years, but you should try to build business credit so you can eventually borrow without risking personal assets.
If You Can’t Get a Loan
You might not initially get approved for a bank loan. Lenders can deny applications for almost any reason, but they should be able to tell you why you weren’t approved. Reasons for loan denial include:
Negative items on a credit report: These include a credit score below the lender’s required minimum, too many recent credit inquiries, or delinquent payments.6 1
Problems with your income or debt-to-income ratio: If your credit isn’t the culprit, your income may be too low or your debt-to-income ratio may be too high.7
Other personal attributes: Lenders can also deny you for other reasons, including your employment history or instability in your residence.
If you do get denied, you may have to figure out another solution, write a letter, or try to borrow with the help of a co-signer with stellar credit and income. A loan denial does not get recorded on your credit report or hurt your credit score.8 So if you work to resolve the issues that led to the denial, and re-apply, your prior denial won’t be used against you. You may well get approved on your second try.