The basic steps to borrow from a bank
Getting a loan from a bank means asking the bank to lend you money that you promise to pay back with interest over a set period. The bank wants to know three things before it says yes: that you can afford the payments, that you have a history of paying debts on time, and that you have something of value to back up the loan if you cannot pay.
The process has five main steps. First, you gather documents that show your income and debts. Second, you choose the type of loan you need. Third, you fill out an process. Fourth, the bank checks your credit and finances. Fifth, the bank makes a decision and, if approved, you sign papers and receive the money.
The whole process usually takes one to four weeks, depending on the bank and the loan type. Some banks move faster than others, and some loans require more checking than others.
Key Takeaways
- Banks need to see proof of income, existing debts, and a credit history before they will lend you money.
- You will need documents like recent pay stubs, tax returns, bank statements, and a government ID to start the process.
- Your credit score and debt-to-income ratio — how much you owe compared to what you earn — are the two biggest factors in whether a bank says yes.
- If your credit is poor or you have no credit history, some banks offer secured loans that require collateral, or you can look for a co-signer.
- The interest rate you receive depends on your credit score, the loan type, and current market rates — better credit usually means a lower rate.
What documents you need to bring
Banks ask for documents to verify that you earn what you say you earn and that you can handle a new payment. Bring recent pay stubs (usually the last two months), your most recent tax return, and bank statements from the last two or three months. If you are self-employed, bring tax returns for the last two years and recent bank statements showing business income.
You will also need a government-issued ID like a driver's license or passport, and your Social Security number so the bank can pull your credit report. If you rent, bring a recent lease or a letter from your landlord showing you pay on time. If you own a home, bring your mortgage statement.
Some banks ask for additional documents depending on the loan type. For a business loan, you might need a business plan or financial statements. For a car loan, you will need the vehicle identification number (VIN) or details about the car you want to buy. Ask the bank what it needs before you come in — most banks list this on their website or can tell you over the phone.
How banks decide whether to lend to you
Banks use two main measures to decide. The first is your credit score, a three-digit number (usually between 300 and 850) that summarizes your history of paying debts. The higher your score, the more likely a bank will lend to you and the lower your interest rate will be. You can check your credit score for free once a year at annualcreditreport.com, which is the official site run by the three major credit bureaus.
The second measure is your debt-to-income ratio, which is the total of all your monthly debt payments divided by your gross monthly income (the money you earn before taxes). Most banks want this ratio to be below 43 percent. For example, if you earn $4,000 a month before taxes and your current debts cost $1,500 a month to pay, your ratio is 37.5 percent. A new loan payment would push this higher, so the bank might say no if the new payment would take you over 43 percent.
Banks also look at how long you have worked at your current job (usually at least two years is better), whether you have a savings account, and whether you have any negative marks on your credit report like late payments or collections accounts. A bank may still lend to you even if your credit is not perfect, but you will likely pay a higher interest rate.
Different types of loans and what each one requires
A personal loan is unsecured, meaning you do not have to put up collateral — the bank is lending based on your credit and income alone. These loans usually have higher interest rates because the bank takes more risk. You can use the money for almost anything.
A secured loan requires collateral, something of value that the bank can take if you do not pay back the loan. A car loan is secured by the car itself. A home equity loan is secured by your house. Because the bank has something to fall back on, secured loans usually have lower interest rates than personal loans. You need to own the item outright or have significant equity in it (meaning you have paid down a large portion of what you owe).
A credit-builder loan is designed for people with no credit history or poor credit. The bank holds the money you borrow in a savings account while you make monthly payments. Once you finish paying, you get the money. This builds your credit history without requiring you to have good credit to start.
A co-signed loan means someone else (usually a family member) promises to pay the loan if you cannot. The co-signer's credit and income are checked too. This can help you get a loan or a better interest rate if your own credit is weak, but it puts the co-signer at risk.
What happens after you submit your process
Once you turn in your process and documents, the bank pulls your credit report from one or more of the three major credit bureaus: Equifax, Experian, and TransUnion. This is called a hard inquiry and it temporarily lowers your credit score by a few points. The bank also verifies your income by contacting your employer or reviewing your tax returns, and it checks your bank statements to see how you manage money.
The bank then makes a decision: approved, denied, or conditional approval (approved if you provide more information or meet certain terms). This usually takes three to seven business days, though some banks are faster. You will receive the decision by mail, email, or phone, depending on how you applied.
If you are approved, you will sign loan documents that spell out the interest rate, the monthly payment amount, the number of months you have to pay, and any fees. Read these documents carefully before signing. If you are denied, the bank must tell you why, and you have the right to see a copy of your credit report for free within 60 days.
How to improve your chances if your credit is weak or you have no credit history
If you have no credit history, start by becoming an authorized user on someone else's credit card account, or open a secured credit card where you deposit money as collateral. Use it for small purchases and pay the full balance every month. This builds a credit history over several months.
If you have poor credit, focus on paying all bills on time for at least six months before you explore for a loan. Even small improvements to your credit score can lower your interest rate. Check your credit report at annualcreditreport.com for errors and dispute any mistakes you find — errors can drag down your score unfairly.
You can also look for a bank that specializes in lending to people with weaker credit. Credit unions (member-owned financial institutions) sometimes have more flexible standards than large banks. Community banks often know their customers personally and may consider factors beyond just your credit score. Ask about credit-builder loans, which are designed specifically for people rebuilding credit.
Interest rates and fees you should know about
Your interest rate is the cost of borrowing the money, expressed as a percentage of the loan amount per year. A lower rate means you pay less overall. Your rate depends on your credit score, the loan type, the loan amount, how long you have to pay it back, and the current market rate. Banks publish their rates, but you may not see your exact rate until after the bank checks your credit.
Banks also charge fees, which vary by bank and loan type. Common fees include an origination fee (charged when the loan is created, usually 1 to 5 percent of the loan amount), an process fee, a prepayment penalty (charged if you pay off the loan early), and late fees (charged if you miss a payment). Ask the bank to list all fees in writing before you sign anything.
To compare loans fairly, ask each bank for the Annual Percentage Rate (APR), which includes both the interest rate and most fees in a single number. This makes it easier to compare one loan to another.
Frequently Asked Questions
What is the minimum credit score I need to get a loan from a bank?
Most banks prefer a credit score of at least 620 for a personal loan, though some will lend to people with lower scores at a higher interest rate. Credit unions and community banks sometimes work with scores as low as 580. The exact minimum varies by bank and loan type, so call ahead and ask.
Can I get a loan if I just started a new job?
Most banks want to see at least two years at your current job, but some will consider you after one year if you have been in the same field longer. Self-employed people usually need two years of tax returns. If you are new to the workforce, a credit-builder loan or a co-signed loan may be easier to get.
How long does it take to get the money after I am approved?
After you sign the loan documents, the bank usually deposits the money into your account within one to three business days. Some banks are faster. For a car loan, the bank may send the money directly to the car dealer instead of to you.
What if the bank denies my loan?
The bank must tell you why in writing. Common reasons are low credit score, high debt-to-income ratio, or insufficient income. You can try again after improving your credit or paying down other debts. You can also try a different bank, a credit union, or a secured loan option.
Can I pay off my loan early without a penalty?
Some loans allow early payoff with no penalty, but others charge a prepayment penalty. Ask the bank about this before you sign. If you plan to pay early, choose a loan without a prepayment penalty.