How to apply for a loan: 6 steps

Taking out a loan can help you pay for all kinds of things—like schooling or a new home or car. But if you’ve never applied for a loan before, you may be wondering how to do it. While the process differs a bit depending on the type of loan you need, there are some general steps to take, no matter the loan type.

Read on to learn all about how to apply for a loan.

Key takeaways

• Determining how much you need to borrow, assessing your financial situation and researching lenders are a few important first steps to take before applying for a loan.

• Getting pre-qualified or pre-approved can help you determine what loan you may be eligible for. And it can be particularly helpful when buying a home or car.

• You’ll need to provide information like your address, income and employer when filling out the application.

• Improving your credit or maintaining good credit before you apply can increase your chances of approval and help you get a lower interest rate.

How much you borrow depends on the purpose of your loan. For instance, if you’re planning to buy a car, your loan would usually be for the cost of the vehicle. For a home, it’d be the cost of the home, minus your down payment. For a debt consolidation loan, you’d add up all the outstanding debts you’d like to pay off with your loan and borrow that total.

While you might feel compelled to borrow a little extra, keep in mind that whatever you borrow, you need to pay back—plus interest. Try to only borrow what you need.

Before a lender reviews your credit history to determine your creditworthiness, you should take a look at it yourself. You can pull your credit reports from each of the three major credit bureaus—Experian®, Equifax® and Transunion®—through AnnualCreditReport.com.

You can also use a credit-monitoring tool such as CreditWise from Capital One. It’s free for everyone—whether or not you’re already a Capital One customer. The CreditWise Simulator can even give you an idea about how financial decisions could affect your credit. And using CreditWise will never hurt your credit.

 Your creditworthiness is how lenders determine whether you’re responsible enough to lend to. It’s based on your payment history, how much debt you have and how long you’ve had accounts open, among other things. 

Your debt-to-income ratio, or DTI ratio, is another factor lenders will consider. It reflects how much debt you have compared to how much you earn, expressed as a percentage. Your DTI ratio can help lenders determine whether you can manage additional monthly payments and how likely you are to repay a loan on time. The lower your DTI ratio, the better.

Comparing lenders can make it easier to narrow down your options. Look into different lenders and compare them based on:

• Offerings: Do they offer the type of loan you’re looking to get?

• Interest rates: What will the interest rate be?

• Fees: Are there fees like an origination fee, late fee or pre-payment penalty? What other fees do the lenders charge?

• Repayment terms: How long will it take to repay the loan? The longer the term, the lower the monthly payment will be.

• Pre-qualification: Does your potential lender let you see whether you pre-qualify? This option lets you check whether you’re eligible without causing a hard credit inquiry.

In some cases, getting pre-qualified or pre-approved for a loan is a great tool to have. When you’re buying a home or car, for example, having a pre-qualification or pre-approval letter from your lender tells the seller that you’re serious about buying. 

A pre-qualification or pre-approval letter is a document a lender shares that says they’re willing to lend to you, up to a certain amount and based on certain conditions. These letters usually have an expiration date—up to 90 days from being issued, for example—so you can use the letter to shop around within that time frame.

Every lender has different requirements for completing a loan application. But in most cases, you’ll need to include:

• Income information, like from W2s or pay stubs.

• Tax returns.

• Address verification, usually through something like a utility bill.

• Bank statements, as well as savings account and investment information.

• Employer information.

You’ll also need to answer some questions about how much you want to borrow, your potential repayment terms and more, depending on your lender.

Once you’ve chosen a lender and gathered your documents, it’s time to complete a full loan application. Make sure you thoroughly read your loan agreement before signing so you know exactly what your obligations are.

In most cases, you’ll get results almost immediately. If you’re denied, you can complete an application with another lender. If you’re approved, you’ll receive an email about completing your account setup and when you’ll start making payments on your loan.

While the process of applying for a loan can look a bit different depending on the type of loan you need, there are a few general steps worth taking, no matter the loan type.

It’s important to determine how much you need to borrow, assess your finances and research lenders. Then getting pre-qualified or pre-approved can help you determine what you might be eligible for. Finally, you’ll need to provide information like your address, income and employer once it’s time to fill out the application.