NEW YORK, NY / ACCESSWIRE / December 28, 2024 / Obtaining a personal loan is relatively straightforward. A prospective borrower submits a loan application, which the lender either approves or declines. Upon approval, the borrower agrees to pay back the loan amount, with interest, over a specific period, also known as the "term" of the loan. This article will explore how the personal loan application process works.
Submit a personal loan application
There are a few ways to apply for a personal loan, but these may vary depending on the lender. One method is physically going to a bank or credit union and filling out a paper application. Another is to apply online. This option is often available at traditional banks, but some lenders operate exclusively online. Due to lower overhead costs, some of these may be able to offer better rates and terms.
Typical lender criteria for loan approval
The loan application initiates a loan approval process. While the approval process will vary from lender to lender, it often involves reviewing the applicant's credit history, debt-to-income ratio (DTI), and income, among other things. This review can help a lender understand how much risk there may be when issuing the loan.
Credit score
The FICO credit scoring system is the most used by lenders, but it's not the only one. A FICO score is calculated using several variables, including "amounts owed" and "payment history." Good credit habits could help loan applicants increase their credit scores over time.
Debt-to-income ratio
The lender may also evaluate the prospective borrower's debt-to-income (DTI) ratio. The DTI is calculated by dividing total monthly debt payments by gross income. In this case, lenders are looking for lower numbers. Typically, a DTI of 35% to 40% or less may be required for a personal loan, but there may be more flexibility if the applicant has strong credit. Prospective borrowers can take steps to lower their DTI by paying off debt, increasing their income, or both.
Income
Proof of a steady income is important for lenders to see that a borrower has the ability to repay the loan. Lenders may ask for pay stubs, tax returns, or bank statements to verify proof of income.
Receive funds
Once the borrower's loan application is approved, the lender will deposit the funds either by check or direct deposit, depending on how the borrower requested to receive the money. The borrower can then use the money however they see fit, whether to pay for a car repair, consolidate debt, or simply provide a little extra cushion between paychecks.
Tips for applying for a personal loan
Shop for a lower interest rate
The interest rate of a personal loan is typically fixed. That means that it won't change over the life of the loan. Applicants should shop around for the lowest rate before applying for a loan to ensure they get the best rate possible. Prequalification gives borrowers an idea of what loan terms they might qualify for based on general information they provide, but it's not a guarantee of approval.
Negotiate the loan term
The loan term is the number of months the borrower is required to make payments. The total interest paid on the loan will typically be smaller with a shorter term. Even with a lower annual interest rate, longer terms could become more expensive over time. This is often overlooked when negotiating loan terms. Borrowers should look for a "total cost" line in the agreement to ensure they are aware of how much they will be paying in interest and associated fees.
The Bottom Line
Several factors go into getting approved for a personal loan and deciding which loan offer is the best fit. Applications may be able to be submitted online or in person. Applicants should check their credit score and DTI before they submit. Once approved, the focus should shift to getting the lowest interest rate and best possible terms before agreeing to take out the loan.
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SOURCE: OneMain Financial
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