By Justin Pritchard. Banking/Loans Expert
Justin Pritchard helps consumers navigate the world of banking.
If you’ve never borrowed before, you might not know how to get a loan. Get started on the right foot by learning about the loan process from start to finish.
What Kind of Loan?
In some cases, you won’t have much choice -- it’s not likely that anybody will lend you enough to buy a home unless you use a loan designed for that purpose. In any case, using a loan that matches your need will improve your chances of getting the loan and keep your costs low.
Decide Where to Borrow
Shop around once you know what type of loan you need. Again, your choices may be limited based on the kind of loan you want: some places don’t offer business loans .
You should also start at the institutions best known for making affordable loans (for example, go through your school’s Student Aid office for an education loan before you go to the bank for a loan).
Banks and credit unions are a good place to shop for most loans. Check with several institutions and compare interest rates and costs. You can also try peer-to-peer loans, using a website with multiple lenders or somebody you know to fund the loan. Just make sure you put everything in writing so everybody’s on the same page -- especially if you borrow from friends or family.
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Avoid high cost loans and predatory lenders. It’s tempting to take what you can get when you’ve been turned down repeatedly and don’t know how else to get a loan. However, it’s not worth it; they’ll lend you money, but you’ll find yourself in a hole that’s difficult or impossible to get out of. Payday loans and rent-to-own programs tend to be the most expensive options, and loan sharks can be outright dangerous.
Understand Your Credit
You generally need “credit” to get a loan. This means you’ve got a history of borrowing and repaying loans. How do you get a loan if you don’t have credit? You have to start somewhere, and that generally means borrowing less and paying more. Once you develop a strong credit history, lenders will lend you more and offer better rates.
You can view your credit for free -- you get one free report per year from every credit reporting agency. Take a look through your credit history to understand what lenders will see. Do you look like an
attractive borrower? If there’s not much in there, you may need to build credit. Be sure to fix any mistakes in your credit files, as they’ll hurt your chances of getting a good loan.
Understand the Loan
Before you get a 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.
It’s a good idea to run loan calculations before getting a loan. This allows you to see how much you’ll pay for the loan, and how a different loan amount (or interest rate ) might save you money. There are plenty of online tools out there to help you calculate loans .
Get a loan that you can really handle -- one that you can 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 towards loan repayment -- lenders call this a debt to income ratio -- and borrow less if you don’t like what you see.
Apply for the Loan
You’re ready to get your loan once you’ve:
- Picked the best type of loan
- Shopped the competition
- Spruced up your credit, and
- Run the numbers
At this point, you can go to your lender and apply. The process is easy to start: simply tell the lender you want to borrow money, and tell them what you’re going to do with the funds. They will explain the next steps and how long the process will take. In some cases, you may be approved instantly. In other cases the process takes a while and you’ll have to provide extra information (bank statements and pay stubs are required to get a home loan. for example).
If You Can’t Get a Loan
You might not get a loan on your first try. Lenders can deny applications for almost any reason, but they should be able to tell you why you weren’t approved. In most cases, they don’t believe you have an income or credit history to justify the loan you’ve applied for. You may have to figure out another solution, or you can try to borrow with the help of a co-signer .