Finance

Published on March 3rd, 2022 | by Bibhuranjan

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Undeniable Tips To Consider To Qualify For A Bank Loan

Student, business, personal, mortgage, or whatever type of loan you need, you can’t get one unless you are prepared for every bit of it. Moreover, every loan has a different approval rate, payment frame, interest rates, and collateral value, thus making it even harder for the borrower to understand the terms and conditions.

And to add fuel to the fire, almost all the banks and lenders review certain factors to evaluate your loan application.

These are some of the many factors that can make the lenders think to approve or deny your loan request. Like, there are so many loans to choose from and endless things to look out for each loan.

So, what are you supposed to do? How can you decide which loan is suitable for you and have better chances of approval? Most importantly, how can you make yourself eligible for the loan? Let’s find out!

Different Loans For Different Purposes (Qualification Tips)

Image Credits: Freepik

Understanding different loans can help you choose which option is best for your situation because there’s a separate loan choice for business, studies, mortgage, insurance.

In fact, you can also get a short-term payment loan to buy your fiance a unique ring. And, applying for the wrong loan for the wrong reason will only lower your chances of approval.

Personal

As the name suggests, this loan is usually applied for personal reasons like paying emergency bills, debt consolidation, buying a home appliance, etc.

According to Investopedia, personal loans are more like installment debts in which the borrowed money is repaid in a set time.

  • The borrower can get this loan for any personal cause
  • It can be an unsecured loan (no collateral for security) or a secured loan (collateral as security)
  • The monthly installments period can go from two to five years
  • Unsecured type can be quite expensive with a high-interest rate
  • You can get it from the bank or any professional lender

How To Qualify For Personal Loan?

The last thing you want for your loan application is to get rejected because of incomplete information. So, do your homework first and then apply. Here are some readworthy tips to secure the chance:

  • Look for professional and trustworthy lenders. It’s better to compare three or more options of lenders and banks to know what you have on the plate to choose from
  • Calculate the origination fee before applying, as you’ll know what you’ll get after the deduction (some lenders charge a higher fee, and others do not)
  • Know your monthly installments. It’s smarter to do all the numbers beforehand to decide whether you can pay it off on time or not. Then, you can plan your finances to stay on the budget while saving for the payments
  • Having a fair credit score is a necessity, but the higher the score lower the interest rate will be

If a personal loan is what you need, carefully look at all the factors and thoroughly analyze everything.

Mortgage

A mortgage loan usually covers the home or property expense. It is a type of long-term loan that includes paying installments for a long time.

  • A mortgage loan is limited to property or home
  • It is a secured loan (collateral is the property itself)
  • You can get it from a bank, official loan programs, or credit union
  • A mortgage payment is used to cover the interest first (a tiny amount is used to deduct principle in the beginning) and later used to pay the mortgage principle in full

Diffen explains the difference between a loan and a mortgage: the latter will always be applied for a property, piece of land, or home. So let’s understand the mortgage loan a bit better with these terms:

  • Mortgagor: The person applying for the mortgage is a mortgagor
  • Mortgagee: The broker or lender you’re applying the mortgage to becomes the mortgagee
  • Equity: The difference between the amount you owe and the worth of the property is the home equity. For instance, if your home is worth $300,000, but you owe a mortgage of $200,000, the equity will be $100,000.
  • Principle: It is the actual amount you borrowed as a loan (interest is the additional payment on the loan)

How To Qualify For Mortgage Loan?

Getting your mortgage loan approved can be a hard task. But, it’s the asset of your whole life so you can’t afford to miss this.

Here are some mortgage qualification rules by Mortgage Calculator which you can follow to avoid such situations:

  • Know Your Limit: Calculate what you can spare from your budget to pay down for the installments and decide based on that amount. So, of course, it will highly depend on your monthly income. But, the general rule is to keep the installments under 28 to 44 percent of your income.
  • Good credit history can save you a ton: As credit experts always say, good credit history can benefit you in many life situations. Applying for a mortgage loan is definitely one of them. If you have a good credit score and clean credit history, your loan approval chances with a low-interest rate immediately increase.
  • Do your homework on pre-qualification: It estimates how much you can borrow and how much you can pay back. It depends on your finance documents and credit reports which lenders will demand. It doesn’t guarantee loan approval but can surely give you the amount you can afford.
  • Study your pre-approval: It involves your excellent credit history, documents of assets, income verification, driver’s license, etc. Pre-approval is more like a review of your case by the lender.

Getting in touch with the lender on all the documents required and other qualifications can help you stay away from a lot of stress. Another piece of advice is to do this process before searching for your dream house.

Business

If you’re a startup business in need of immediate financing, this can be the right loan type to kick start your growth. However, if you’ve below 300 employees, you can also think of getting a small business loan.

  • You can get this loan directly from banks or SBA (small business administration)
  • It is solely for supporting businesses to grow and expand
  • It can be secured (low interest and profitable) or unsecured (high-interest rate and riskier) depending on your business plan

However, a business loan can be hard to get as there are certain factors that the lenders will look into:

  • Business strategy (how you plan to use the money and return it)
  • Product quality and reputation
  • Business and product reviews
  • Debt history
  • References

How To Qualify For A Business Loan?

Good credit score, worthy collateral, an effective business plan, and annual revenue are some of the qualifying factors that can make your loan application stronger.

However, according to BDC, you need to satisfy the 5 C’s of lending to your lenders for successfully qualifying for a business loan:

  • Character: How well do you present and plan your loan project. Does your business management have enough skills to generate the desired revenue? Do you have a realistic business plan?
  • Capacity: Can your business do more than just survive? What is the risk factor for your loan acceptance? Can you pay back the loan payment on time without missing any installment?
  • Capital: Do you have any liquid assets? What are the chances of your stable growth? What is your business’ profitability rate? What is your past growth history?
  • Conditions: Do you agree to an annual growth review? Can your business prove to be a low-risk factor to the terms and conditions?
  • Collateral: The number of assets you can submit for collateral? What is the total value of your security compared to the total amount of loan?

If you can fulfill the demands of each C of the lending, you’ll eventually increase your chances of loan approval.

Student

Last but not least on our list comes the student loans. As the name suggests, this type of loan is exclusive for paying the tuition fees or living expenses regarding the college or school.

Depending on how much you need, you can get private or federal student loans.

But, surely, the federal (High protection and interest rate) is less risky and can provide more benefits than private loans (less protection and loan benefits).

How To Qualify For A Student Loan?

Studying in top schools can cost a hefty amount, and if you’re a struggling youngster, it can be difficult for you to continue your journey. However, you can follow these tips to qualify for a student loan:

  • Apply to FAFSA and get good results
  • Keep an excellent academic record and maintain it
  • Provide proof of your study (GED, high school diploma, graduate degree)
  • Explain clearly your reasons (prove your financial need)
  • Know your options and look for different programs before applying, as it can help you find the suitable one for you

However, before applying for the loan, be clear about your status if you’re an independent student or have the support of a guardian. However, the former is preferred for approval.

FAQ

Yes, you have read the whole guide. Yep, you understand every bit of it. But, still, there might be some queries you wanted answers to. Right? Comment below your questions or share more tips with the whole finance community and us!

Now let’s read answers to questions asked by people like you who want to understand the loan world a little better.

Can I raise my chances of loan approval?

Yes, you surely can by keeping these helpful loan approval tips in mind:

  • Research for brokers who’re most likely to approve your loan application
  • Consider the loans you think are easy to manage
  • Build your poor credit score first, and then apply for the loan
  • Maintain your stable finances and show proof to the lenders
  • Review your credit history and clear any negative mark

Are there any specific factors banks look into for loan approval?

The bank considers several factors to approve a loan. Some of them are:

  • Credit score, payment history, and credit report
  • Stable earning and job history
  • Debt-to-income (DTI) ratio
  • Liquid assets (marketable collateral, cash, etc.)
  • Terms of your loan (payment schedule, interest rates, terms and conditions, etc.)

Can I convince the bank to grant me a loan?

Well, it depends on your history and effective skills. But, here are some tips:

  • Explain to the lenders your capability of giving back the money
  • Show them how you plan to balance your income and revenue
  • Understand the number and apply for the loan amount with a high approval chance
  • Provide the full guarantee of your loan

Is there an easy loan?

Yes, car title, pawnshop, payday, installment loans are some bank loans that can quickly be approved. As these all are among short-term money solutions, they can be helpful for borrowers and less risky for lenders. So now you know which loans to apply for in need of emergency cash.

How will the bank evaluate my loan request?

The underwriter or sponsor will evaluate your application as per your cash flow, financial stability, and collateral’s worth by comparing it with the amount of loan you requested. If everything is in accordance, your evaluation will be complete soon, and you’ll get the loan.

Conclusion

Do you need money for your business, vehicle, tuition loan, or home? Are you planning to apply for a bank loan to help your case? You’re at the right place!

However, finding the right loan and the lender isn’t enough to guarantee your loan approval. There’s a whole lot of homework that you need to do to secure your chances. And, understanding the loan approval factors, conditions of the lenders, and your finances will only take you a step closer to your goal.

So, give this thorough guide a read and decide how you can increase your chances of being among the lucky ones!


Cover Image Credits: Freepik

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Editorial Officer, technofaq.org I'm an avid tech enthusiast at heart. I like to mug up on new and exciting developments on science and tech and have a deep love for PC gaming. Other hobbies include writing blog posts, music and DIY projects.



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