Financial, News

How Does Loan Processing Work?

Loan Officer and client

If you’re going to take the time and effort to apply for a personal loan, either very soon or at some point in the future, then you might want to understand the process so that you know what to expect.

While processes do vary, depending on the institution, there’s a general protocol that most lending institutions follow, beginning with your application. So, how does loan processing work? Read on.

What is a Personal Loan?

This is money lent by a bank or other financial institution with an established repayment period of monthly payments.

How are Personal Loans Used?

A personal loan is a type of credit that can help you with a large purchase or emergency, or that can facilitate high-interest debt consolidation. The interest rate on personal loans is usually lower than what credit cards carry, so such loans are often used to consolidate debt from multiple accounts into a single, smaller payment.

What are Some Terms I Should Know?

There are some loan terms you should be aware of before applying. Those include:

  • Unsecured loan. Most personal loans are unsecured, which means there’s no collateral involved.
  • Monthly payment. This is the repayment amount you’re to submit monthly, which includes payment toward the principal as well as the interest.
  • Term. This is the number of months you have for loan repayment.
  • Annual percentage rate. The APR combines both your interest rate and the fees the lender charges to make the loan.
  • Interest. This is essentially the price you pay the lender for letting you use its cash for a period. Expressed as a percentage, interest is paid monthly along with your payment toward the principal.
  • Principal. This is the total borrowed, an amount that will decrease with each payment.

Before Applying

Before you go through the application process, you’ll need to check your credit score to see what lenders might see. While you’re at it, look over your credit report to see whether there are errors that could be suppressing your score.

If your score isn’t where you want it to be and you have time to work on it – after all, you can get a quick turnaround with Achieve — then do so. Even if you can get a loan with your current score, the lender will likely give you a higher rate to offset your risk.

The Application Process

Loan processing is broadly the same for most financial institutions. It starts with your application, which, depending on the lender, may be done online. You’ll state how much you’re seeking to borrow and the loan’s purpose, although the latter may not be that important. You’ll also need a driver’s license or some other proof of identity and address.

On the lender side, the loan process basically begins, as stated above, with a look at your credit report and scores. Many lenders need to see a minimum score of about 600 to qualify. In any case, the rule of thumb is that the higher your score, the lower your potential interest rate and the better your terms.

Lenders also have requirements regarding income, so that they know you can repay. Such requirements vary, however, and may not even be made public. Still, you’ll need to produce proof that may include bank statements, tax returns, or pay stubs.

Lenders will also check out your debt-to-income ratio, which compares how much you owe every month to how much you make. To know your DTI before the bank does, add up your recurring monthly payments and divide them by your total gross monthly income. Lending institutions generally prefer DTIs that are under 36 percent.

If your loan is approved, you may be assessed an origination fee to cover application processing, running credit checks, and any closing costs. Such fees typically run between 1 percent and 8 percent of the entire loan amount.

In the end, it can only help you to know how loan processing works so that you can be prepared and know what to expect. We do recommend Achieve for your personal loan needs.


More on this topic:

Stress-Free Family Loan Contract: How to Prepare and Negotiate Fair Terms

Stress-Free Family Loan Contract: How to Prepare and Negotiate Fair Terms

Previous ArticleNext Article
THE USE OF ANY COPYRIGHTED MATERIAL IS USED UNDER THE GUIDELINES OF "FAIR USE" IN TITLE 17 § 107 OF THE UNITED STATES CODE. SUCH MATERIAL REMAINS THE COPYRIGHT OF THE ORIGINAL HOLDER AND IS USED HERE FOR THE PURPOSES OF EDUCATION, COMPARISON, AND CRITICISM ONLY. NO INFRINGEMENT OF COPYRIGHT IS INTENDEDX