Loans are considered financial products commonly offered through financial institutions, but also private lenders like credit unions. These loans allow you to make a bigger purchase, typically something that cannot be paid for upfront. These include mortgages for a house, car loans or personal loans.
Understanding how to get a loan from the bank, what steps you need to follow and how to set yourself up so you meet all requirements will increase your chance to get approved.
How to get a Loan from the Bank
Before we take a deeper dive into how to get a loan from the bank, let’s understand the types of bank loans that exist. This education will help you decide on the appropriate loan for your financial goal.
Types of Bank Loans
Want to know how to get a loan from the bank? The first step is understanding the common loans that exist, which include:
These loans are borrowed for a fixed amount and time period (anywhere between 6 – 60 months). During this time, you must pay back the amount through regular payments which often include fees and interest. Personal loans are commonly used to consolidate large debt, renovate homes or expense a big event like a wedding.
This loan is intuitive- it is used to purchase a vehicle. These loans are more flexible in the amount borrowed and time period set to pay it back. Car loans still include interest on the full amount, a predetermined amount and payment schedule during the loan period.
While business loans work similar to a personal loan, they are used to finance business costs and expenses. If you start a small business or project, you may need a business loan.
Line of Credit
Line of credits (LOC) aren’t loans but rather borrowing options offered by financial institutions. They work like a credit card and if approved, you can borrow against it as much as you need. LOCs can be secured or unsecured. Secured loans have a lower interest rate because they are tied to a collateral that relates back to you such as a car or house. Whereas, unsecured LOCs are riskier and have a higher interest rate because of the lack of collateral. Interest only accumulates on the borrowed amount and there is no specific deadline to pay it back. However, interest on a large amount can be as big as hundreds of dollars so be sure to pay it as soon as possible.
Mortgages are loans taken out to purchase a property or house. They have an extensive application process and tend to last a lot longer than line of credits, personal or car loans (typically 10-25 years to pay the loan back).
How to get a Loan from the Bank or Credit Union
Once you understand what kind of loan you need for your expenses, it is time to learn how to get a loan from the bank. You will need to apply for the loan, this can be done online or in person. You will need to speak to either a personal banking advisor or a financial advisor for this process depending on your bank. Ideally, most people borrow money from their regular bank because they have built up a history with them, however it may be in your best interest to shop around of the lowest interest rates possible at different financial institutions.
Your eligibility for a loan approval depends on the following criteria:
- Proper Identification
- Proof of Address
- Proof of employment
- Minimum income
- Credit Score
Applying for a loan often requires a hard credit check which helps institutions determine your ability to pay back the loan. Learn more about credit checks with AstroWealth’s guide.
How does a Hard Credit Check for a Loan affect your Credit Score
Some factors that affect your credit score include how much credit you use, if you make payments on time and the type of credit you have. When a credit union or financial intuition is performing a credit inquiry, it can temporarily cause your credit score to drop. Taking out a loan can help you build your credit score over time as long as your credit utilization is below 35% and you make your payments on time. If you however, have multiple loans where you make the minimum payment or fail to make any payment over time, this will negatively impact your credit score.
What might cause your Loan Application to be Denied?
The reasons why your application was denied may or may not be released to you. AstroWealth is here to help you understand the common reasons for denial, so you can be prepared well beforehand. Some common reasons include:
- Low credit score
- Insufficient income
- Too much existing debt
- Unestablished credit history
If you get denied for an application and still need financing, you should consider:
- Ask a friend or family members with an established credit score to co-sign the loan with you
- Borrow a smaller amount instead
- Ask around for a lender with flexible criteria
- Borrow a secured loans instead of unsecured
Now you know the different types of loans that banks offer, how to get a loan from the bank, how to be prepared for an application and what to do when your application is denied.
Use the credit inquiry to your advantage to unlock access to money at a low-rate. If you are looking for more information, check out our Personal Finance Guides that includes understanding credit and debt.
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