Getting a loan from a bank involves seven steps, from learning your credit score to approving the loan. Though each lender will have varying requirements, the process is straightforward. It’s crucial to be responsive to your lender’s requests throughout the process.
If you’re looking into how to get a loan from the bank, you’ve come to the right place. Benzinga outlines the step-by-step process to help you prepare and understand what to expect throughout the process. Whether using the loan to upgrade parts of your home or consolidate debt from higher-interest sources like credit cards, a bank loan can be a smart move for your finances.
How To Get A Loan From A Bank: 7 Steps
Here’s a look at how to get a bank loan. While the steps might vary slightly depending on the institution you use, this broad overview will help you get started in understanding the overall process.
1. Pull Your Credit Report
The first step is to pull your credit report to determine your credit score. This will help you better understand the rates and terms you might qualify for, ensuring the loan fits into your monthly budget.
Lenders use your credit score to determine risk factors in lending you money. The higher your credit score, the better your rates will be because you are a lower risk to them. Better rates start with a FICO score of 670 or higher because, in that range, you’re considered to have good credit.
You can check your credit score with any of the three major credit bureaus for free. Many credit card companies include scores in their monthly statements now, so you can check there. If you discover your credit is poor or fair, improve before applying for a loan.
- Make on-time payments
- Reduce credit utilization ratio below 30%
- Pay down debt to reach a debt-to-income ratio of 35% or less
2. Calculate Your Loan Value
Now, it’s time to examine your finances and decide how much of a loan you need. If you borrow too little, you might not have enough to accomplish your goals, which could reduce the value of the loan. But if you borrow too much, you’ll pay origination fees and interest on funds you don’t really need.
In the next step, you’ll use this number to calculate your estimated monthly payment to determine whether this loan is affordable and fits your monthly budget.
3. Calculate Your Estimated Monthly Payment
Use a loan calculator to calculate your estimated monthly payment based on your interest rates and the value of your loan. Test different numbers to see how various interest rates and terms could impact the total cost of the loan.
Now plug in the monthly payment to your budgeting app or spreadsheet to see if you have the cash flow to cover the loan. Don’t overextend yourself and take on a loan you know you can’t pay. This will harm your credit and lead to major financial challenges that you might not be able to get yourself out of.
4. Go Through the Prequalification Process
Complete the prequalification process to get real estimates from the bank about what your loan will cost you and what you qualify for in terms of rates and terms. You’ll need to input some basic financial details such as your annual salary, mortgage or rent, auto loans, student loans, child support, and other financial commitments. This will tell the lender what you can afford and permit them to do a credit check to learn more about your creditworthiness and reliability as a borrower.
Make sure your bank does a soft credit check. Too many hard credit checks will impact your credit score. Try to get prequalified with three banks. That way you can compare rates and make an informed decision about the best loan for you. Lenders use various criteria to determine rates, which means you’ll likely get different numbers as you go through this process with different lenders.
5. Review Loan Terms
As you review your prequalification details, look at the various loan terms from each lender. You’ll want to pay attention to the following.
- Fees: Many lenders charge fees in addition to the principal and interest. Look out for prepayment penalties and review the origination fees, which can be anywhere from 3-12%. Some lenders charge no origination fees for individuals with good credit; ideally, that’s the loan you want.
- Repayment terms: Loans can be between one and seven years. Some lenders have more options than others. While longer terms can help make your monthly payment more affordable, they also mean you’ll pay more in interest throughout the life of the loan.
- Discounts: The bank where you have accounts might offer discounts to thank you for your patronage. Check whether your loan estimate includes discounts, such as one for autopay.
- Loan restrictions: Some lenders require you to use the funds only for specific use cases. If so, make sure those regulations meet your needs.
- Funding time: Some lenders can fund your loan within hours of approval, while others quote a few business days. Depending on your financial situation, consider how the funding time might impact you.
6. Apply with Your Lender of Choice
Once you’ve reviewed all the information the various lenders have provided, select the one that best meets your needs. Now, you’re ready to complete the full application. You’ll need some basic information about yourself, including your name, Social Security number, address, date of birth, etc. You’ll also need to upload a photo of the front and back of a government-issued ID.
Be ready to input loan specifics, including the term and amount you’re seeking as well as how you’ll use the loan.
Upload documentation for income, debts, and other items your lender requests. Once you’ve provided all this information, the lender will complete a hard credit inquiry, which could temporarily lower your credit score for a few months. However, you should see an immediate decision about whether your lender will move forward with the loan.
7. Evaluate the Loan and Accept It
Your loan rates and terms could change once you’ve input documentation for your income and existing financial commitments. That’s because it might differ from what you put in your prequalification application. Review the loan offer carefully to ensure you like the terms presented.
Now, you can accept the loan offer and move the loan to the funding phase. Make on-time payments for the loan, and consider adding a little extra each month to reduce the total cost of the loan and pay it off early.
Bank Loans vs. Other Personal Loans
Compare how a bank loan stacks up against other personal loans to determine the best loan form for you.
- Payday loans: The biggest difference between a bank loan and a payday loan is that it is not an installment loan, meaning you won’t pay it back with monthly payments. Instead, the total amount is due once you receive your next paycheck. While this can be good because it helps you make ends meet and doesn’t stretch the cost of the loan over the next few years, these loans are often predatory as people take out the total value of their next paycheck or close to it, which means they won’t be able to meet other obligations.
- Peer-to-peer loans: These are loans that private investors fund. If you don’t fit the standard underwriting criteria for a bank loan or other loan form, a peer-to-peer loan can help because they are more flexible since they are not from financial institutions. The application process might also be simpler, which can mean faster funding.
- Online loans: Some online lenders are willing to work with individuals with less-than-perfect credit. This can benefit you if you have lower credit. Online lenders often have fast funding times as well. But you’ll lose the ability to go to a physical bank location to discuss your loan and your needs.
When To Consider a Bank Loan
Bank loans can be helpful in various circumstances. Here are some times when you might consider borrowing funds through your financial institution.
- You have a good credit score: Banks are picky about who they do business with. The better your credit score, the more of a fit you’ll be for a loan through a bank.
- You have high-interest debt you want to pay off. Consolidating high-interest debt with a bank loan can be wise. The most common type of high-interest debt is credit card debt, where rates can be as high as 35.99%. A bank loan could help you secure a lower interest rate and repay the debt sooner.
- You experience an emergency expense: A major car repair or home expense can come out of nowhere, and you aren’t ready financially for it. A bank loan might be a good idea if that's the case.
Pros and Cons of Bank Loans
Learn the pros and cons bank loans can offer as you decide whether this is a wise move for your finances.
Pros
- Lump sum payout: A bank loan can help you make large purchases by paying a lump sum all at once.
- Fast funding: Bank loans offer money quickly, which can help with surprise expenses, such as car or home problems or medical bills.
- Option for unsecured loans: You don’t need to put forth collateral for a bank loan, which means you aren’t at risk of losing your valuables.
- Lower interest rates: When you have the credit score to qualify for a traditional bank loan, you’ll likely get lower rates than going elsewhere.
- Longer loan terms: Stretch out your loan payments with longer loan terms to make the monthly payment affordable.
Cons
- The total loan cost can be pricey: Once you add up the fees and total cost of interest over the loan term, the loan could exceed the amount you borrow. This is especially true for those with lower credit scores.
- Strict eligibility requirements: Banks have more stringent requirements than online institutions in most cases.
- Fees and penalties might not be apparent: Reading the fine language for your loan might take a lot of work to understand. Ask your lender about fees and penalties so you know what you’re committing to before you commit to it.
- More debt: No matter who you take out the loan from, a new loan means new debt. That increases your total debt load, impacting your ability to get a new line of credit or stretch you too much with your monthly payments.
- Potential damage to your credit score: You’ll see a dip in your credit for several months after taking out a new loan. Avoid doing this in advance of a major purchase, such as a home or vehicle.
Alternatives to Bank Loans
The main alternative to a bank loan is using a credit card with an intro offer. If you open a new credit card with an intro offer, you can pay no interest on the funds for 12-18 months. You’ll need to be comfortable with the hit to your credit that a new card can have, and you’ll want to evaluate the merits of the new card as far as earning you more rewards in certain categories.
If all you need to finance is a few thousand dollars, a credit card can be smart because it could save you hundreds of dollars in interest payments on a loan.
Cover Large Expenses or Consolidate Debt
A bank loan can help cover large expenses or consolidate other debts at a lower interest rate. Talk to the bank where you have accounts to see if you qualify for special discounts or features due to your existing relationship with the institution. Follow the step-by-step guide and get started with your bank loan today.
Frequently Asked Questions
What do you need to qualify for a bank loan?
To qualify for a bank loan, you’ll need to meet the credit score requirements, have income to cover the loan, not have a bankruptcy filing within the last year, and provide the required documentation. Specifics will vary based on the lender.
How easy is it to get a bank loan?
If your credit score is 670 or higher, you’ll likely be able to get a bank loan within a few days. Individuals with lower credit might need to shop more for a lender willing to work with low credit.
About Rebekah Brately
Rebekah Brately is an investment writer passionate about helping people learn more about how to grow their wealth. She has more than 12 years of writing experience, focused on technology, travel, family and finance. Her work has been published in Benzinga, Hearst Bay Area, FreightWaves and Dallas Observer publications.