Do you want to drive a car? Own a house? Go to the University? Consolidate your debt? Finance your wedding?
If you answered “yes” to any of these questions, chances are you will need to apply for a loan at some point. If you do, don’t feel bad; more than half of americans say they have taken out a loan at some point in their lives.
When you decide to get a loan, what can you expect from the loan approval process? Here’s a step-by-step guide that will show you what to expect at each step as you try to get your loan approved.
Decide how much you need
Your first step before applying for a loan should be to decide how much you need. In situations where you buy something with your loans like a car, house, or college, the amount is predetermined by what you want to buy. You will obviously need a much larger loan for a massive mansion compared to a repairman.
However, if you’re applying for a personal loan to consolidate debt or fund a major expense like a wedding or vacation, you need to budget. Take a close look at how much you’ll need to cover your expenses and try to cut out anything that isn’t necessary. You don’t want to end up with too much debt too quickly.
Submit a pre-approval request
Once you’ve decided what product you want to buy or how much you need, it’s time to submit pre-approval requests. Pre-approval is not an official application for a loan or line of credit. Rather, it is an opportunity to ask lenders if they could be willing to lend you money, and what rates you might be able to receive.
Since pre-approvals do not perform credit checks, you can feel free to shop around for the best rates and provisional amounts. However, keep in mind that pre-approval offers don’t always go exactly as planned. If the lender discovers more information about your financial situation during your actual application, it could result in higher rates, lower amounts, or even a complete denial.
When you receive mail notifications about a home loan pre-approval or personal loan pre-approval, keep in mind that it’s just that: a pre-approval. It is not a guarantee of funds.
Apply for the loan
Once you’ve found the best pre-approval limits and rates, it’s time to apply for the loan itself. Where we recommended shopping for pre-approvals, we do do not advise to submit as many loan applications as possible. In fact, we advise you to try to apply to some lenders as possible.
Every time you apply for a loan, you let a lender pull your credit report. When you have too many serious inquiries on your credit report in a short time, it can tank your credit score as well as not paying your bills. So try to limit your options to the first three, at most.
The lender reviews your application
After you submit your application for loan approval, the lender takes some time to review your application details and assess the risk the loan may pose. Lenders assess a variety of different factors to determine how much of a debtor you are, including employment, income, other debts, and your credit score.
This process is also known as underwriting in the financial and insurance industry. Different lenders have different standards that they expect to meet. While some only care about your income and credit score, others will contact listed workplaces directly to verify that you work there.
Generally, the higher the amount you request, the stricter you can expect the application process to be.
The lender gives you the results of your application
After some time to deliberate on their risk rating factors, the lender responds to you with the results of your application. For some lenders, especially these days, your results can be instantaneous. This tends to be true if you are in a good credit position and likely to be approved.
However, if your credit situation is more complicated, the lender may ask you for additional information or verification. This may delay your final results or even result in a refusal if you refuse to provide the requested information. If your loan application results in a denial, you will most likely receive a notice in the mail within a few weeks explaining the reasoning behind your denial.
What can cause lenders to turn you down?
Thus, you have submitted a request for personal loan approval and come back empty-handed. Which give? Why did the lender turn you down, even though you’re sure you’ll pay back what you owe?
Unfortunately, lenders cannot afford to take your word for it. “I’ve got you next time I see you” doesn’t fly when you’re dealing with thousands of dollars. So, what can lead to the rejection of your application? The main factors include:
Bad credit score
If you want to get approved for a loan with a decent interest rate, or approval at all, you need a credit score to less in the six hundred range. If it’s less than this amount, you may need to look for lenders that cater specifically to people with bad credit or opt for a secured loan.
Factors that can worsen your credit score include:
- Maximum credit cards
- Unpaid invoices and debts
- Bankruptcy
- Too few accounts
If you are having trouble with any of these issues, you should try to resolve them before reapplying.
High debt to income ratio
If you owe tens of thousands of dollars but are struggling to bring in twenty thousand a year, lenders frown. Even if you meet your minimum payments, your debt burden massively exceeds your income. They won’t want to risk lending you more money and not receiving their due.
Lack of work history
This comes into play a lot more during the mortgage pre-approval process, but your work history may factor into your ability to get a loan. If lenders see that you are inconsistent in your job, they can reasonably assume that this inconsistency spills over into other areas of your life as well. Plus, inconsistent employment could affect your ability to make payments on time, which is a risk they won’t want to take.
Lack of credit history
Sometimes not having any credit history can be as harmful as having poor credit. If lenders have no prior information on which to base their decision, trusting you to repay the loaned amount is a huge risk. More cautious lenders or loans with higher amounts may decide to look elsewhere if they can’t be sure you’ll pay what you owe.
How can you improve your chances of loan approval?
Now that you understand what factors can cause a potential lender to turn you down, let’s discuss how you could improve your chances of getting approved for a loan. Some ways you can help yourself in this regard include, but are not limited to:
Repair your credit score
The higher the credit score, the more likely you are to be approved, the lower your interest rates will be, and the more your loan amounts can increase. So if you find every lender’s door slammed in your face, it’s time to dig deep and fix your credit score. Some actions you can take to improve this factor are:
- Keep your cards paid
- Pay your bills on time
- Diversify the types of accounts you have
By repairing your credit score, you can then get approved more often and for better loans than before.
Repay what you owe
If the problem is your debt-to-income ratio, the most obvious way to increase your chances of loan approval is to pay back the amount you owe others. By reducing your level of debt, you also reduce your debt-to-income ratio. This makes it easier for lenders to believe that you will have the money you need to pay what you owe.
Maintain stable work
If you can hold down a steady job for a year or more, it shows lenders that you’re capable of being consistent and aren’t likely to fail on payments. Try to stick to your current position for as long as you can before applying for a loan to increase your chances of approval.
Types of loans you may need in your lifetime
Finally, let’s review the types of loans you might need in your lifetime. The most common types are personal, student, home, and auto loans. However, you may also want debt consolidation loans, which are designed to help you combine your debts. Or, if you’re getting furniture from a warehouse, you might need an installment loan.
Let’s review the loan approval process
No matter what type of loan you need, the loan approval process is the same. You determine your budget and then request pre-approval. After that, you submit your application, the lender reviews it and either extends the loan or denies it. If you need more information on how the process of getting a loan works, check our blog daily for more helpful financial articles like this.
