How to apply for a loan: 6 steps

A loan is a funding option that can help you pay for large costs 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.

What you’ll learn:

• Before applying for a loan, you should determine how much you need to borrow, assess your financial situation and research lenders.

• 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 score 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 improvement project or a debt consolidation loan, you’d add up all the potential and outstanding debts you’d like to pay 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.

Before a lender reviews your credit history to determine your creditworthiness, check your credit score and credit reports to understand how lenders will view you. You can pull your credit reports from each of the three major credit bureaus—Experian®, Equifax® and TransUnion®—through AnnualCreditReport.com.

There’s no set standard for the credit score you need to qualify for a loan. Every loan type and lender is different, so it’s important to see whether you meet the eligibility requirements before you complete a full application. But keep in mind that the better your credit scores, the better the terms of your loan—like the amount you can borrow and the interest rate—will generally be.

You can use a credit-monitoring tool such as CreditWise from Capital One, which is free for everyone—whether or not you’re already a Capital One customer. Plus, using CreditWise won’t hurt your credit.

Lenders use creditworthiness to determine whether you’re responsible enough to lend to. Additionally, your debt-to-income (DTI) ratio is another factor lenders will consider. DTI ratios can help lenders determine whether borrowers can manage additional monthly payments and how likely they are to repay loans 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.

It’s also a good idea to consider the annual percentage rate (APR), monthly payments, fees and actual loan terms before accepting an offer.

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.

Once you’ve researched the loan terms and features that best serve your needs, you are ready to start the loan application process. In most cases, you’ll need to include the following:

• 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

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

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 need to start making payments on your loan.

Have additional questions about applying for a loan? Check out answers to these frequently asked questions for more insights:

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 regardless of the type of loan.

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.

If you’re ready to apply for a loan but want to improve your credit scores first, consider comparing credit cards from Capital One. You can filter by rewards, rates, fees, credit level and more. Find the card that’s right for you and apply online today.