How to Get a Loan
Understand the Process from Beginning to End
Borrowing money can help you do things, but the process can be complicated. Mistakes can be expensive, and they can cause your loan request to be rejected. If you need to get a loan, learn what to expect and what you can do ahead of time.
What Kind of Loan?
The first step is to figure out what 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 equity in your home
- Personal loans, which can be used for almost any purpose
- Business loans for starting or expanding your business
- Education loans (student loans)
In some cases, you won’t have much choice - it’s not likely that anybody will lend you enough to buy a home unless you use a loan designed for that purpose. Using a loan that matches your need will improve your chances of getting approved and will keep your costs low.
Decide Where to Borrow
Shop around. Again, your choices may be limited based on the kind of loan you want: some places don’t offer business loans or student loans. Start your search at the institutions best known for making affordable loans (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. There are also several websites with access to multiple lenders. Borrowing online is perfectly safe as long as you stick to reputable sites.
Some people borrow 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. 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. 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 and rent-to-own programs tend to be the most expensive options, and loan sharks can be outright dangerous.
Understand Your Credit
You generally need “credit” to get a loan. This means you’ve got a history of borrowing and repaying loans. How do you get a loan if you don’t have credit? You have to start somewhere, and that generally means borrowing less and paying more. Once you develop a strong credit history, lenders will lend you more and offer better rates.
If you know that you have bad credit, see How to Get a Loan With Bad Credit
You can view your credit for free - you get one free report per year from every credit reporting agency.
Take a look through your credit history to understand what lenders will see when you ask for a loan. Do you look like an attractive borrower? If there’s not much in there, you may need to build credit by gradually adding loans to your history. Be sure to fix any mistakes in your credit files, as they’ll hurt your chances of getting a good loan.
Understand the Loan
Before you get a 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.
There are plenty of online tools out there to help you calculate loans. It's also wise to view an amortization table (whether you build it yourself or let a computer do it for you) so that you can see how the loan 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 if you don’t like what you see. Lenders often want to see a ratio below 30% or so.
Apply for the Loan
You’re ready to get your loan once you’ve:
- Picked the best type of loan
- Shopped the competition
- Spruced up your credit, and
- Run the numbers
At this point, you can go to your lender and apply. The 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.
Go Through Underwriting
After you submit your 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. 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 - that’s generally a good sign. When lenders ask for details, it means they're taking underwriting seriously and are more likely to offer competitive rates.
How to Get Loans for Business
Business loans are similar to any other kind of loan. Lenders look for the same basic things. However, new businesses don’t have a long borrowing history (or credit). Nnew 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.
In most cases, and individual - such as the business owner - has to use their personal credit and income to qualify for the loan. They 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 get approved on your first try. Lenders can deny applications for almost any reason, but they should be able to tell you why you weren’t approved. In most cases, they don’t believe you have sufficient income or the credit history to justify the loan you’ve applied for. You may have to figure out another solution, or you can try to borrow with the help of a co-signer.