Content of the material
- 1. Credit Score and History
- 5. Can I afford the monthly payment?
- 5. Origination Fee
- Know Your Rights Under Regulation Z
- Home equity line of credit Upgrades? This one’s on the house.
- Determine the Type of Bank Loan You Need
- 2. If something looks amiss, pull your credit report
- Understand the Loan
- How to get your credit report and credit score
- Factors that will affect your interest rate
- What Are the Different Types of Personal Loans?
- Why it matters
- Tips for speeding up the process
- 7. Do I have a good enough credit score?
- 7. Try to get preapproved
- Get needed cash using your home’s equity
- Alternatives to bank loans
- What do banks look for in a business loan application?
1. Credit Score and History
An applicant’s credit score is one of the most important factors a lender considers when evaluating a loan application. Credit scores range from 300 to 850 and are based on factors like payment history, amount of outstanding debt and length of credit history. Many lenders require applicants to have a minimum score of around 600 to qualify, but some lenders will lend to applicants without any credit history at all.
5. Can I afford the monthly payment?
When you apply for a personal loan, you have the opportunity to choose which repayment plan works best for your income level and cash flow. Lenders will sometimes provide an incentive for using autopay, lowering your APR by 0.25% or 0.50%.
Some people prefer to make their monthly payments as low as possible, so they choose to pay back their loan over several months or years. Others prefer to pay their loan off as quickly as possible, so they choose the highest monthly payment.
Choosing a low monthly payment and a long repayment term often comes with the highest interest rates. It might not seem like it because your monthly payments are so much smaller, but you actually end up paying more for the loan over its lifetime.
As a general rule, borrowers should aim to spend no more than 35% to 43% on debt, including mortgages, car loans and personal loan payments. So if your monthly take home pay is $4,000, for instance, you should ideally keep all total debt obligations at, or under $1,720 each month.
Mortgage lenders in particular are known for denying loans to people with debt-to-income ratios higher than 43%, but personal loan lenders tend to be a bit more forgiving — especially if you have a good credit score and proof of income. If you think you can temporarily handle higher payments in order to save a lot on interest, you may be able to stretch this ratio a bit to take on a higher monthly payment.
It's harder to be approved with a debt-to-income ratio above 40%, and stretching yourself too thin could lead to cash flow problems. You should only do this as a temporary measure and if you have some kind of safety net, such as a partner's income or an emergency fund.
5. Origination Fee
Though not part of the qualification process, many lenders require borrowers to pay personal loan origination fees to cover the costs of processing applications, running credit checks and closing. These fees usually range between 1% and 8% of the total loan amount, depending on factors like the applicant’s credit score and loan amount. Some lenders collect origination fees as cash at closing, while others finance them as part of the loan amount or subtract them from the total loan amount disbursed at closing.
Know Your Rights Under Regulation Z
In 1968 the Federal Reserve Board (FRB) implemented Regulation Z which, in turn, created the Truth in Lending Act (TILA), designed to protect consumers when making financial transactions. Personal loans are part of that protection. This regulation is now under the auspices of the Consumer Financial Protection Bureau (CFPB).
Subpart C–Sections 1026.17 and 1026.18 of the TILA require lenders to disclose the APR, finance charge, amount financed, and total of payments when it comes to closed-end personal loans. Other required disclosures include the number of payments, monthly payment amount, late fees, and whether there is a penalty for paying the loan off early.
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Determine the Type of Bank Loan You Need
Next, figure out what type of bank loan 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 the equity in your home
- Personal loans, which can be used for almost any purpose
- Business loans for starting or expanding your business
- Student loans for educational purposes
- Fast loans, which can provide quick cash for emergencies
Some lenders may let you take out a certain type of loan that does not match your specific loan need. For example, you can generally take out a personal loan to pay for health, home repair, or other expenses. However, other loan types must be used for a specific purpose. For example, you generally have to use a mortgage loan to buy a home. In addition, you may not be eligible for all types of loans. To get a student loan, for example, you usually have to provide proof of enrollment in a degree program.
Tip Credit scoring algorithms are often customized for certain lenders and for certain loan types, so it benefits you to select a loan type that matches your need for the money.
2. If something looks amiss, pull your credit report
Your credit score is three-digit number that measures your likelihood to repay a debt. It’s based on the information contained in your credit report, which monitors all of your credit-related activity.
You can find your credit report for free on annualcreditreport.com from any of the three major credit bureaus weekly through April 20, 2022. While this report won’t give you your credit score, it will show you information about your credit and payment history, which lenders use to decide whether to give you a loan. Reviewing your credit report can help you know what you need to improve.
Understand the Loan
Before you get a bank 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 money. It’s also wise to plug the loan terms into a loan calculator again and view an amortization table (whether you build it yourself or let a computer do it for you) so that you can budget for the loan and see how it 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 toward loan repayment—lenders call this a debt to income ratio—and borrow less money if you don’t like what you see. Many lenders want to see a ratio below 36% or so.
How to get your credit report and credit score
You can request your credit report at no cost once a year from the top 3 credit reporting agencies ― Equifax®, Experian®, and TransUnion® through annualcreditreport.com. When you get your report, review it carefully to make sure your credit history is accurate and free from errors.
It is important to understand that your free annual credit report may not include your credit score, and a reporting agency may charge a fee for your credit score.
Did you know? Eligible Wells Fargo customers can easily access their FICO® Credit Score through Wells Fargo Online® – plus tools tips, and much more. Learn how to access your FICO Score. Don’t worry, requesting your score or reports in these ways won’t affect your score.
Factors that will affect your interest rate
Personal loan qualification requirements vary based on the lender, but there are a few criteria that many lenders look at to determine your interest rate offer.
- Your credit score: Good credit can make it easier to qualify for a personal loan at a lower interest rate. Lenders will review your score and your credit history for adverse marks, like late payments or delinquent and defaulted accounts.
- Debt-to-income (DTI) ratio: Your DTI ratio is the amount of your monthly debt divided by your monthly gross income. Generally, a low DTI ratio is a signal to lenders that you can manage monthly payments on a new personal loan.
- Loan term: Generally, loans with shorter repayment terms offer lower interest rates. A longer repayment term typically means a higher interest rate.
- Co-signer: If you don’t meet the lender’s qualification requirements, having a trusted family member or friend in good financial health be your co-signer can increase your chances of approval — potentially at a better interest rate.
If you have a low credit score and a high DTI ratio and don’t have a willing co-signer with good credit and stable income, you won’t be eligible for the lowest personal loan rates. However, a strong credit score and a low DTI ratio will attract the most competitive rates.
What Are the Different Types of Personal Loans?
The different types of personal loans are:
- Debt-consolidation loan: rolls multiple debts into one new loan
- Co-signer loan: a loan you need a co-signer to qualify for
- Secured and unsecured loans (unsecured are more common)
- Fixed and variable rate loans (fixed are more common)
Why it matters
Capital matters because the more of it you have, the more financially secure you are ― and the more confident the lender may be about extending you credit.
Tips for speeding up the process
If you’re looking for a personal loan, you likely want to get your hands on the money as soon as you can. These tips can help you avoid delays when applying for a personal loan.
- Check your credit report before applying. Know where your credit stands before shopping around for personal loans. Spotting and correcting errors immediately is a simple way to avoid issues later on when you’re applying for a loan.
- Pay off debt. If you have debt and you don’t need the loan funds urgently, paying some debt off can raise your credit score and lower your DTI ratio, which can increase your chances of approval.
- Talk to your existing financial institution. Banks and credit unions might be more willing to consider a personal loan application from a customer with whom it’s had a positive, long-standing relationship.
- Consider online lenders. Many online lenders offer next-day loan decisions, and funds may be deposited into your bank account within a few days after applying, if you are approved.
- Pick loan funds up in person. If your lender has a brick-and-mortar location, ask if there is an option to pick funds up at the branch so you can get the money faster.
7. Do I have a good enough credit score?
Before you start applying for personal loans, it's important to know your credit score to make sure you can qualify. Most personal loan lenders are looking for applicants to have a good credit score, particularly online banks. However, if you have an existing relationship with a bank, you may get approved for a favorable deal if you have a good history of paying bills on time and honoring the terms of your past loans and accounts.
Sometimes, credit unions will offer lower interest rates on personal loans and work with borrowers who have fair or average credit scores. But you often need to become a member and sometimes you need to open a savings account before you can qualify for a loan.
For people who don't have a great credit history, Upstart accepts applicants who have insufficient credit history or don't have a credit score at all. You will likely pay higher fees and interest rates than if you had a good credit score, so be sure to clearly read the terms and conditions before you sign on for the loan.
7. Try to get preapproved
Although it’s not a solid guarantee, preapproval is when a lender extends an unofficial offer on a loan, pending full approval.
In this instance, preapproval will tell the borrower what loan amount, terms, and repayment schedule they will likely qualify for in advance. Also, a preapproval acknowledges that the borrower has met the bank’s general eligibility requirements.
You won’t impact your credit score if you check your loan rates for preapproval, because most companies only produce a soft credit inquiry when pulling your credit report. That won’t be visible to third parties or affect your credit score.
The process usually includes an application and a credit history evaluation. Remember that while it’s a worthwhile step to take, there’s no guarantee that the bank will extend the exact same terms when it comes time to issue a loan.
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Alternatives to bank loans
Bank loans are not your only option. You can work with alternative lenders to secure the funding you need. Alternative lenders are an option to consider if your business doesn’t qualify for a traditional loan. Here are two alternative lending options to consider:
- Online loans: Online lenders are normally more flexible with loan qualifications, and the turnaround time is faster, but the rates may be higher than traditional loans. Lendio is one such online lender. You can submit an application through their secure interface.
- Microloans: Microloans offer a small amount of money to help you cover certain costs within your company. Microloans usually have a relatively low interest rate. The disadvantages of microloans include a shorter time frame to pay back the loan, and some lenders require that the money from the microloan be spent on specific expenses like equipment purchases.
What do banks look for in a business loan application?
When applying for a business loan, it’s imperative that you keep a bank’s requirements in mind. Each bank has its own loan application forms. Many institutions offer their applications online, though some still require you to fill out a paper form. Based on the loan amount and the kind of loan you’re seeking, the bank may have a preferred method of applying.
In addition to how a bank prefers to receive a loan application, you should also consider the prerequisites that a bank needs in order to be considered for approval. There are many factors that go into a potential approval, so prior to applying, be sure to check on the following:
- Credit score: A high credit score shows that you’re reliable when it comes to paying down your debt. A good credit score not only can make or break your application, but it also impacts the interest rate and loan term length the bank offers you.
- Purpose of the loan: Some loans come with stipulations for how they’re used. For instance, a lease is generally used to obtain equipment, while a mortgage is for real estate purchases.
- Available collateral: If your credit score isn’t good enough, some lenders will make an exception if you can put some valuable items (usually property) up as collateral. If you fail to meet the agreement’s repayment guidelines, you can lose that collateral to the bank, which will likely sell the assets in question to recoup some of its losses.
- Cash flow: Banks want to know you have a steady stream of income. Without a consistent cash flow, traditional lenders could be skittish about approving your loan. Many lenders require a certain amount of revenue before even making such a consideration.
- Financials: Cash flow history is one type of document that the bank will want to see prior to approving a loan. You will also need to show well-researched financial projections for your business.
- Business plan: Any type of lender can ask for your business plan before reviewing an application. There are many resources available to help you get started on writing an effective business plan for your organization.
- Capital: Working capital refers to how much money the company has on hand to cover operating costs. If you don’t have any working capital, you may be considered a high-risk investment.
Key takeaway: Only you know your business’s financial situation. By gathering the appropriate information, you can assuage a lender’s concerns about your business’s ability to repay financing.