A Step-By-Step Guide To Getting A Loan

Getting a loan can be a complicated and time-consuming process. It can be financially draining if you don’t understand the terms and conditions of your loan. However, if you properly prepare and do some research in advance, you can avoid any adverse outcomes of applying for a loan. Try these simple steps to get a loan so you can identify favorable terms and rates.

Discover What Type of Loan You Need

Before you begin shopping for a loan, it's essential to understand the type of loan you need. Deciding which loan you need may impact your interest rate and terms as well as the application process. For example, mortgages and auto loans are completely different loan products; therefore, borrowers must treat them as such.

Some of the most common loans include mortgages, auto loans, student loans, personal loans, and small business loans. Knowing what type of loan you need in advance will ensure you’re properly prepared for the loan application.

Review Your Credit Score

One of the most important factors lenders will look at when reviewing your application is your credit score and credit report. To understand what they may see, be sure to review your credit report and credit score in advance. You can review a copy of your free credit report annually at AnnualCreditReport.com.

Lenders usually give more favorable interest rates and terms to borrowers who have a high credit score. However, your credit score isn’t the only financial factor the lender will review.

The lender will also review your debt-to-income ratio (DTI), which compares your recurring monthly debt with your income.

You can find this number by adding up your recurring monthly debt (mortgage, credit cards, student loans, etc.). You will get a decimal number and will then need to convert it to a percentage. According to Experian, lenders look for a DTI of less than 43%.

Compare Lenders

There are many loan options available, so it’s important to compare lenders to find the best loan available. You may want to begin by comparing loans from banks, credit unions, peer-to-peer lending platforms, or online lenders. Online lenders tend to have the best rates, while payday lenders should generally be avoided due to high fees and interest rates.

Key factors to compare:

• Interest rates
• Loan repayment terms
• Minimum and maximum loan amounts
• Loan duration
• Early prepayment penalties
• Hardship programs availability

Some lenders allow you to prequalify for a loan. A prequalification application lets you see potential rates and terms before applying. Submitting prequalification applications results in a soft credit inquiry, which won’t impact your credit score.

Prepare and Submit Your Loan Application

Once you find a suitable lender, it’s time to apply. Some applications may result in a hard credit inquiry, which could impact your credit score. Lenders may review the following information:

• Employment history
• Income
• Cash flow
• College degree
• Length of current residence
• Frequency of phone number changes
• Professional licenses

After submitting your application, it will go through underwriting. This is where lenders verify all information and may ask for additional details before approval or denial. Depending on the lender, you may receive a response within 24 to 48 hours.

Understand Your Next Steps

If you’re approved for a loan, carefully review the contract. Pay close attention to:

• Loan terms
• Interest rate
• Any extra fees

If you're rejected, make sure you understand why. You may need to work on your credit score or other financial factors before reapplying.