How to Get a Personal Loan

A personal loan is an important lending instrument that consumers use for a wide variety of purposes. Understanding the various steps that are involved in the loan process will help the applicant secure the best interest rate while enhancing their chances for a loan approval.

Different Types of Personal Loans

Banks and credit unions offer personal loans that are either secured or unsecured. A secured loan is extended when the borrower offers collateral as a way to compensate the lender in case there is a default on the loan. Instruments that are accepted as collateral include annuities, CDs, letters of credit or unencumbered real estate.

Unsecured personal loans do not carry any requirement for collateral. They are extended primarily based on the borrower’s exceptional credit and the good faith of the lender.

Since secured loans are backed by the borrower’s collateral, lenders rely less on credit history when evaluating the viability of that type of loan. Interest rates are usually more favorable since the bank’s exposure is reduced substantially when compared to an unsecured loan.

Application and Approval

Lenders use several different criteria when evaluating a loan application. Borrowers need to recognize the different factors that are used to establish interest rates and determine maximum borrowing limits.

* Credit Score: The most critical element in the approval process is the applicant’s credit score.

Conversely, a poor credit history that includes delinquent payments and a heavy debt load may result in restricted loan amounts, higher interest rates, or an outright rejection.

* Debt to Income Ratio: This is a measurement which calculates the percentage of fixed obligations relative to total income. Gross monthly income is divided by mandatory outlays which establish the DTI ratio. Lenders vary widely on their DTI requirements, but it is important to determine the banks threshold for acceptance prior to applying for the loan.

* Employment: A steady employment history displays the type of consistency banks look for when assessing a loan application. Two consecutive years with the same employer is most advantageous, but an extensive work history in the same profession is also acceptable.

Preparation is the Key

As with every loan application, it is important to be straightforward with any information requested by the lender. Credit Unions and banks earn their income off loan revenue, so they are highly motivated to approve every loan that meets regulatory and internal lending standards.

Answer every question honestly, and be prepared to provide documentation that verifies employment and income through W-2 forms, pay stubs and income tax returns.

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