Getting approved for a loan is not an easy process. Banks are looking for a lot more in an applicant now.
So, it’s critical that loan applicants present a complete picture of their financial background for the bank to review. With that in mind, here’s how to get a loan.
Determine the type of loan you want
There are many types of loans, including mortgages, auto loans, credit cards, personal loans and payday loans. You should understand what type of loan you’re applying for when considering how to get approved.
If a lender determines that your credit is not good, it may offer a secured loan. Those willing to put their home or vehicle up as collateral may qualify for better rates on mortgages, car title loans or home equity loans.
However, these are secured personal loans, which means you could lose your property if you’re unable to make the payments.
Decide where to borrow
It’s smart to shop around for a lender, though the choices may be limited based on the type of loan needed.
Start by looking at banks or credit unions known for making affordable loans. Check with several institutions and compare their costs and interest rates. You should also consider the terms you can afford and your strategy for paying off the loan.
Build a good credit score
In seeking a loan, you should know your credit history and current credit score. The higher the credit score, the better you’ll look to potential creditors.
Credit scores range from 300 to 850. You should take steps to improve your credit score before applying for a loan. Here’s what your credit score means to lenders:
- 760+ — Excellent credit.
- 700+ — Good credit.
- 640+ — Fair credit.
Establish a stable source of income
A stable source of income is equally important as having a positive credit score when applying for a loan. In addition, you should have a stable history of earning income.
Typically, banks require loan applicants to submit recent pay stubs from their jobs, income tax forms or any proof of income to check their ability to repay a loan.
The more stable the history of income, the better the chances of getting approved for a loan with favorable terms, such as a low interest rate.
Loan officers may overlook an average credit score or a few credit indiscretions if an applicant’s income is high.
Know about these other major elements
It is important to pay attention to your debt-to-income ratio. That represents all of your monthly debt payments divided by your gross monthly income.
This number is one way that lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.
And when you apply for a loan, ask for as little money as possible. How much you owe makes up 30 percent of your FICO score. The less you owe in comparison to what you could borrow, the higher your score and the better your loan rate.
In some cases, it may also be necessary to outline the reason for the loan. If it’s a personal loan, banks might want to know how you’re going to use the money since there’s no collateral on such loans.
Have the right expectations
Banks have a specific protocol for approving loans. During the process, make sure you know the sequence of events in the loan process.
Although some loans can be preapproved instantly, the terms and conditions may not be known until days or weeks have passed. Ask the loan officer for advice on following up.
The bottom line
The loan application process can be daunting. If the loan applied for is not approved, ask the bank for specific reasons behind the denial.
It can be dangerous to a person’s credit to continue to apply for loans. Submitting too many loan applications at the same time can hurt your credit and your chances of getting a loan in the near future.
There are many facets in how to apply for a loan, but understanding the process can help to streamline your application.