How to Apply for a Loan

There are many reasons to seek out a loan. Whether you have an unplanned expense, a planned large purchase, or just need extra funding to get you to your next payday, a loan can be a lot of help when you need money now.

Let’s discuss how to better aid you on your personal loan path.

First Steps of Your Loan Journey

Working with a lender can be a simple and pleasant experience. They’re there to help you find the best financial options for your specific situation. So, always feel free to ask questions until you understand what everything means and what you will be agreeing to repay on the loan.

What Is a Loan?

We’re going to take the mystery out of borrowing. Plain and simple, a loan is when a debtor borrows a particular sum of money from a creditor and agrees to pay it back over a specific period of time with fees and/or interest.

Exploring Loan Options

Personal loans can vary by state in amount of money, term length, and even qualifications. Think about some of the following factors when considering a loan:

• How much money do you need?
• For how long?
• In some cases, what is the funding for?
• Are you able to repay on time?
• What is your credit history?

Here are a couple of loan types to consider.

Installment Loan

An Installment Loan is probably what pops into your mind when you think of a typical loan. The borrower gets the full amount of the loan proceeds at the time of loan origination. Then they repay it in regular, fixed installments (usually monthly) during the term of the loan.

Auto Loan

An Auto Loan is a type of secured Installment Loan. The borrower receives the full amount of the loan proceeds at the time of loan origination and then repays the loan in regular, fixed installments. The vehicle may already be owned in full by the borrower or the borrower is buying the vehicle that will serve as collateral for the loan. Collateral is when you use something of monetary value to back up your loan. This makes it a secured loan.

Understanding Secured vs. Unsecured Loans

Let’s jump right in!

• Collateral – This is something of value that a borrower owns or has interest in that they can use to secure their loan. Examples of collateral are a house, a vehicle, or household goods. If the loan is not repaid as agreed by the borrower, the lender has the right to take the collateral as payment for the debt.
• Equity – Tiny math lesson … Equity is the value of your collateral MINUS how much you owe on it. So, if your car is worth $7,000 and you owe $5,000, you have $2,000 worth of equity.
• Secured Loan – This type of debt is secured by collateral which is something of value that secures the loan. A borrower might get more money with a secured loan than an unsecured loan and possibly have a quicker approval path. If the borrower defaults on the loan, the lender can take the collateral as payment of the debt as detailed in the loan agreement. Examples of secured loans are home equity lines of credit, mortgages, and car loans.
• Unsecured Loan – An unsecured loan has no collateral. The approval is based on the borrower’s ability to pay and creditworthiness. A personal installment loan, payday loan, or student loan are examples of unsecured loans.

Loan Considerations

Make sure you know what you are signing up for with a loan and keep these important details in mind!

• Term Length – This is the amount of time in which you are obligated to repay the loan. During this time, you are expected to pay back the loan in installments in accordance with your loan agreement. Installments typically will include principal, interest and/or fees. Depending on the loan, lenders will allow you to pay off your loan early without penalty, but some might add extra fees.
• Repayment Schedule – The amount you owe and your due date are figured out for you in your payment schedule. Be sure to make your payments on time. Any late payments could negatively impact your credit score.
• Interest Rate & Fees – Interest rates and fees vary by state and lender. Be sure to review your loan agreement closely to ensure you understand all of the requirements of repayment to include any additional fees for late payments.
• Requirements – Know what you need to provide to be eligible for the loan. Do you have to have collateral? Do you need a certain credit score? What will it mean if you don’t have those things?
• Lending Limits – Know your limits, and the lender’s. Keep in mind that lenders have minimum and maximum borrowing amounts. Don’t ask for more than you know you can pay back.

Gearing Up for Loan Applications

You’re getting closer to applying for your loan, but let’s check out some important aspects of the application journey.

Credit Score Check

Your credit score is a predictor of your creditworthiness. It goes hand-in-hand with your credit report which shows your payment record. Typically, when you apply for a loan the lender will do a credit check. There are two types of inquiries.

• Soft Inquiry – This is an inquiry on your credit score and report, but it will NOT affect your score. Soft inquiries are often used when pre-qualifying for a loan.
• Hard Inquiry – This is an inquiry on your credit score and report, but it WILL affect your score.

Gathering Documentation

You’ll want to get all your information ready before you apply for your loan. This is a generalized list, the specific lender that you choose may request less or more documentation than what is listed below.

• Government-issued ID
• Steady source of income
• Open bank account
• Working phone number
• Ownership documentation (Auto Equity Loan)
• Vehicle to be used as collateral (Auto Equity Loan)

The Loan Application Process

Now that you’ve learned about different loans and their purposes, you can pick which loan you’d like to apply for and set off on your journey!

Navigating the Application Process

Once you research your possible lenders and make your choice, you’ll need to contact them about an application. This may be done online, in-person, or by phone, depending on the lender. You’ll submit the needed documentation and wait for their loan decision.

From Application to Loan: What to Expect After Applying

If approved, you’ll choose how you’d like your funds distributed. Depending on the lender, this could be electronically, by direct deposit to your bank account, or in cash.

Then, you will make payments according to the Terms of Repayment within your loan documents.

If you are not approved, you will receive a Notice of Adverse Action. This notice will provide information on how to contact the credit reporting agency if their report was used in the lender making their credit decision.

Good luck with your personal loan adventure!

This information is presented for educational purposes only. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.