Get a Loan
Getting a loan, whether for personal use or for a business, can often save the day or help you take advantage of a new opportunity. If you're strapped for cash, a loan might just be the ticket to a better future. However, you must use care and caution when seeking a loan, and you must follow the guidelines lenders have set up. Being thoughtful about how you seek a loan will help you find and get the perfect loan for your specific needs.
Contents
Steps
Preparing to Apply
- Optimize your credit report. Your credit history is the record of your behavior relating to how you borrow money and pay it back. Your credit report is the main determinant in your ability to get a loan.
- Additionally, your credit report contains information about your employment record; the number of times you applied for getting a loan and with which lenders; collection accounts; and judgments.
- Three credit bureaus — Equifax, Transunion, and Experian — collect and maintain your credit history information, including account names and numbers, account types, opening/closing dates, credit limits, balances, high balances, monthly payments and late payments.
- Order a copy of your credit report. You may request one free copy of your credit report each year from each of the credit bureaus. You can contact the credit bureaus on the phone or complete a form online to obtain these reports.
- It is important to get all three, as some bureaus may report different information than others.
- Examine your credit report for negatives. This includes late payments, over-limit balances, collections, and judgments.
- Repair negative issues on your credit report. This may be as simple as reporting an inaccuracy to the credit bureau or may involve paying off a collection or judgment.
- Get your credit score. In addition to your credit report, getting your credit score is a good idea. Generally, a credit score of 640 or above is considered above average and will not give you problems when applying for a loan. If your score is below 640, you may have a tough time finding a lender that won't charge you a high-interest rate or impose other conditions on your eligibility.
- Lenders should be able to give you a range of credit scores required for a particular loan. If you fall within that range based on your credit score, you'll know that you, at least, have a chance at being approved for the loan. You'll have a much harder time qualifying for a loan with a range far above your credit score.
- If you're looking to improve your credit score, you can take certain steps, such as getting a better debt to credit ratio, paying off lingering loans, reducing overall debt and opening multiple lines of (good) credit.
- Establish a stable source of income. Your income is equally as important to getting a loan as your credit. Not only will you need a current source of income for loan approval, but you will also need a stable history of earning income.
- Keep a recent pay stub from your job when you go to apply for a loan. It is possible that lenders will want to see proof of income.
- The more stable the history of income, the better your chances of getting a loan with favorable conditions, such as a low-interest rate.
- Gather documentation. You will have to prove your ability and willingness to repay a loan to get approved for a loan. You will need to provide supporting evidence of these qualities in the form of a credit report (which the lender can pull), bank statements, pay stubs and/or income tax forms.
- Collect these documents and store them in a safe place. Have them ready for when you find the perfect loan to apply for.
- Determine the amount of money you need to borrow. The size of loan you need will help narrow your lender options. Additionally, it is necessary to determine that you can afford the payments on the loan size you need.
Choosing a Loan
- Research the types of loans. You may opt to apply for either a secured or an unsecured loan, and whichever option you choose will affect how you proceed. You can usually get more money for a secured loan than you can with an unsecured loan. Also, secured loans generally have a lower interest rate than unsecured loans. The better your credit history, the lower the interest rate will be.
- With a secured loan, some lenders require that you share in the risk of the loan to receive loan approval. This means that you may have to produce collateral, usually in the form of a note (such as a home or automobile title). Mortgages and car loans are examples of secured loans. If you default on a secured loan, the lender has the right to repossess the collateral. For example, if the borrower defaults on payments for a mortgage loan, the lender can place the house in foreclosure and force the borrower to move out.
- Some common types of secured loans include car loans, boat (and another recreational vehicle) loans, mortgages, home equity loans and home equity lines of credit.
- Unsecured loans are generally smaller than secured loans and do not require you to put up collateral to receive the loan approval. Here, if a borrower defaults, the lender can't repossess anything and, instead, must rely on collection efforts. Because no collateral is associated with an unsecured loan, the amount that someone will qualify for is largely based on his or her credit history and income at the time of the application. Additionally, the interest on an unsecured loan is usually higher than the interest on a secured loan.
- Some examples of unsecured loans include personal loans, personal lines of credit, student loans and credit cards/department store cards.
- Decide whether you should get a “line of credit,” which can be secured or unsecured. In practice, this type of loan is similar to a credit card: The borrower has a maximum allowable balance, and he/she can borrow up to the maximum amount. He/she does not have to borrow the maximum amount.
- Monthly payments range from a percentage of the balance with some lines of credit to payments on the interest with others. The borrower can pay more than the monthly minimum and can pay off the whole balance at once.
- Additionally, some lines of credit come with checks and others can be linked to the borrower's primary bank account.
- Decide if a small business loan might be right for you. If you are borrowing for your business, you can consider a small business or another business loan. The best place to get a business loan is a bank, because banks usually offer the lowest interest rates and most favorable terms.
- The key to being approved for a business loan is to show that your business has been profitable in the past and to show that you and your partners have concrete plans for future success.
- Be very wary of payday lenders. Payday loans offer you personal loans, usually, but not always, for several weeks prior to your paycheck being issued. Unfortunately, because most payday loans are unsecured and many payday lenders engage in predatory tactics, you could be charged from 300 percent up to 750 percent in interest for the life of your loan.
- This high-interest rate will result in you paying significantly more in interest than you would with another type of loan. For example, you might reasonably expect to pay $14 for a $500 advance on your credit card. Your APR for that advance would be about 6 percent. For a payday loan, however, you can expect to pay $105 for a two week advance of $500, giving you an APR of about 400 percent.
- Find a lender. There are many different places to get a loan. Explore the following options, taking your loan needs into consideration.
- Financial institutions are, in most cases, the best place to get a loan. Banks and credit unions may dispense any number of different types of loans, including personal loans, credit cards, auto loans, mortgages and small business loans. Getting a loan through a financial institution may require more qualification than other methods, but you have the option of applying for larger loan amounts.
- Payday advance businesses. These lenders offer a quick and easy loan approval process but, as mentioned above, lend only relatively small amounts and charge very, very high-interest rates. Before using a payday advance loan, rethink whether you really need the loan and if it is worth paying a huge interest rate.
- Friends and family. You may not have to apply to a business or institution to get a loan. Look at the people you know who may be able to help you out financially in exchange for a formal payback agreement.
Applying for a Loan
- Pick one loan institution and only apply there to begin with. Applying for a loan can actually hurt your credit score, which can, in turn, hurt your ability to get a loan. This happens because each time you submit a loan application, your lender will check your credit score. Each time your credit score is checked, your credit score can go down. With a lower credit score, you'll have a harder time finding a lender and will get worse rates. The effect on your credit score will not last longer than a couple of months.
- Try to get an idea of the lender's interest rates before you submit an application. Some lenders offer a pre-approval process that will give you a ballpark estimate of what loan you can get, without the lender pulling your credit report. The lender will ask you to your credit and you need, to be honest, because the estimate the lender gives you will be based on what you tell the lender.
- Of course, the lender might tell you that you need to submit an application to be given a personalized offer. If this happens, tell the lender you're happy to take your business elsewhere if it can't give you a ballpark figure for interest rates on a loan. If the interest rate is prohibitively high, you do not want to apply in the first place.
- Apply for a loan. A large part of the process of getting a loan is preparatory; a precursor to the actual application process. Once you establish your ability to repay a loan and decide on a lender, that lender will give you specifics on what documents you need to provide and what kind of paperwork you will have to sign.
- Wait for the lender to get back to you. The whole process shouldn't take more than five to 10 days before you are either accepted or rejected, depending on how quickly the credit check goes out and the lender's underwriting standards. Be prepared to deal with questions and possibly supply personal information to the lender to help the lender make the correct underwriting decisions.
- If you do not hear back from the lender within the 10-day time period, you can always call and speak to a person you originally spoke with about the loan application.
- Pay any necessary origination fees. When you get a personal loan, origination fees are usually tacked on to the principal and any interest you may be expected to pay. Origination fees vary from lender to lender but expect to pay anywhere from 0.5 percent to 5 percent, depending on your creditworthiness.
Paying Back Your Loan
- Meet all your payment deadlines. Now that the hard part is over, another hard part begins! You may feel like you're home free after you receive a loan and you can pretty well do as you please. That's not the case. Repaying your loan and staying on track with the lender is very important.
- Paying on time will help you avoid a downgrade of your credit score.
- If you want to qualify for a loan in the future, the history of your loans and loan payments will be examined. If the loan still hasn't been paid off well after collection, your credit score will suffer and your ability to get a loan in the future will be negatively affected.
- Many people think they won't need a loan in the future when, at some point, they will. Don't sabotage your ability to get a loan in the future just because you think you won't need one again or get lazy about repayment.
- Be proactive if you are having a hard time making your payments. If you begin to have trouble repaying your loan, talk to the lender directly. Have a frank discussion with the lender about your struggle to pay back the loan. Most of the time, lenders are required by law to treat borrowers fairly and with forbearance.
- Lenders should work with you to develop a repayment plan. It's in their best interest to get back some of the loan instead of none of it.
- Refinance your loan if you can get a better deal down the line. This is especially important if your initial loan had a very high-interest rate.
- Refinancing your loan can happen in a variety of ways. One way is that the length of your loan can be adjusted so that your monthly payments are smaller but the amount of time you have to pay those payments is longer.
Warnings
- This article is for informational purposes only. If you have additional questions, you should talk to a financial or legal professional.
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