Knowing how to get a loan in five easy steps is the financial equivalent of a truck-stop diner combo platter. You need a dash of discipline, a portion of preparedness, and a healthy helping of research to obtain a loan.
Oh, and a side order of loan knowledge and education can go a long way, too.
Without gaining the proper knowledge, the process of getting a loan can be complicated and painstaking at times, especially if you don't have your documents in order when a potential lender requests them.
Getting a loan can also be time-consuming as you sift through your various loan options. Additionally, if you're not careful, it can be financially draining if you sign off on a loan without reading the fine print, and wind up stuck with a high-interest rate and onerous penalties and fees.
Don't let that negative loan scenario happen to you. Take the following five steps to get a loan on terms that are favorable to you, and take full advantage of the benefits of getting a loan in five easy steps:
Step 1: Decide what type of loan is right for you
Right out of the gate, you have a few big decisions to make.
First up is knowing exactly what type of loan you need. That decision impacts the size and duration of the loan, as well as the interest rates attached to the loan. After all, auto loans and mortgage loans, for example, are entirely different loan products, and each needs to be treated uniquely.
Basically, the loans you'll be choosing from come from several standard - and not so standard - loan categories.
Standard loans include:
- Mortgage loans
- Auto loans
- Student loans
- Small business loans
- Personal loans
- Home equity or home line of credit (HELOC) loans
Not so traditional loans include wedding loans, home improvement loans, vacation loans and loans to purchase a pet or valuable collectible.
The goal in the preparation phase of the loan approval process is to know what loan you need, and match that need with a loan that works best for you, especially in terms of loan amount, interest rate, loan duration and repayment terms.
Do that, and you'll increase your chances of getting your loan approved, and likely at a more favorable interest rate.
Step 2: Get Your Credit Score in Order
When learning how to get a loan, getting your credit score in pitch-perfect order should be a top priority, too.
Start by requesting a free copy of your credit report every year (get a free one annually at AnnualCreditReport.com.) Get to know your credit score and thoroughly review your credit report for any inaccurate information. If there are errors, request a deletion. If you need help in doing so, then consult a financial specialist experienced in the field of credit collection.
When a bank or lender requests your credit score, credit reporting agencies compute the score using a proprietary algorithm. While borrowers won't know the exact score lenders are using, they can use their credit scores to understand generally how they appear to lenders, risk-wise.
Improve that risk equation by taking the following credit score improvement steps:
Pay your bills on time
Fulfilling financial obligations by paying bills on time and in full each month shows lenders you have the ability to manage credit.
Build your credit history
Younger consumers looking to bolster their credit history can take several key steps. For starters, check with your landlord to report monthly rent payments to the three major credit bureaus. Additionally, leverage a low-interest card when making smaller purchases like a coffee and danish at Starbucks or by paying your dry-cleaning bill, then be sure to pay the credit card bill on time. To creditors and lenders, a crystal-clear history of on-time payments shows responsible borrowing habits and should boost a credit score.
Monitor your credit utilization
Credit utilization, i.e., the amount of debt used out of all available credit, is one of the key components of your credit score. Lowering your credit utilization ration (keeping the debt owed under 30% of the maximum credit limit is a good rule of thumb) can positively affect a credit score, because it indicates you're managing your credit responsibly.
Check your credit report frequently
Regularly checking your credit report will help you gain a better understanding of your credit history and knowledge of your credit health. A bonus - it's also a good way to check for signs of identity theft.
Once you've taken the proper steps to improving your credit score, you'll be inching closer to getting your first loan.
Step 3: Start Researching Lenders
Your loan options are abundant when getting a loan.
Banks traditionally have been the first stop for loan borrowers, but increasingly credit unions, online lenders and even peer-to-peer digital lending platforms are equally competitive when getting a loan. (Payday loans are also technically an option, but such loans come with skyrocketing interest rates and huge late payment fees. Avoid them when you seek to get a loan.)
Lender comparison websites like LendingTree.com, LendingClub.com and GoCompare.com can help you break down loan options from multiple lenders. On your loan search, focus on the interest rate, loan repayment terms, the duration of potential loans, maximum and minimum loan amounts and the steps you'll need to take if you run into financial trouble and you can't repay your loan. You'll also want to know if there are any prepayment penalties for paying off your loan early.
In addition, check with a potential lender to calculate your monthly loan payment. Or, get a good estimate on your own with an online loan repayment calculator.
Step 4: Prepare Your Loan Application
Once you've reviewed several suitable loan options, and have made a decision, it's time to complete your loan application.
Start by sticking to one lender at a time. Typically, lenders will pull a copy of your credit report, an action that triggers an uptick on your credit score (that's because lenders and creditors deem a loan application to add to credit risk.) Applying to multiple lenders could result in repeated negative hits on your credit score, so that approach should be avoided.
Then, begin the process of collecting the financial data lenders typically want. The more information that lenders want you to provide, the faster and streamlined your loan application process will go. Typically, lenders will want to see the following personal financial information on a loan application.
- Proof of employment
- List of other loans and debt obligations, including mortgage and credit card debt
- Social Security number
- In some cases, you may be required to provide proof of income, such as pay stubs or past tax returns.
- Copy of your driver's license
Your loan application will then go through what the financial industry calls the "underwriting process". That's where your credit is checked, your financial documents are reviewed, and questions are asked and clarified before the lender makes any decision.
There is no hard and fast deadline for a loan application response. In this digital age, many loan decisions are streamlined, with a response sent back to the applicant within 24 to 48 hours, if not sooner, depending on the size of the loan and the paperwork involved.
Step 5: Know What Happens If Your Loan Is Approved or Rejected
If you're approved for your loan, ask for the lending contract and review the terms. Take special note of the loan interest rate, repayment terms, and fees for late payments.
If you're rejected for a loan, you have a legal right to know why your application is rejected.
Chances are, the loan was rejected due to several reasons, including a weak credit score (usually a FICO score of 620 or less may be deemed a low credit score), a high debt-to-income ratio, or a lack of credit.
Each is considered high-risk propositions by a lender and should be addressed before applying for another loan.