How to Apply for a Bank Loan

Written by Kim PinnelliReviewed by Nathan Brown, CFP®Updated: 19th Apr 2022
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A bank loan can be an option if you have a dream but can’t achieve it financially without financing. Some bank loans don’t even require collateral, so it’s easy to get the financing you need, but first, there are some factors to consider.

Below are the simple steps to apply for a bank loan today.

How to Apply for a Bank Loan (Step-by-Step)

#1. Review Your Credit

Before applying for a bank loan, you should always check your credit. The higher your credit score is, the higher your chances of approval become, and you’ll have access to better rates and terms. Everyone gets free weekly access to their credit reports. Check your history and see what you might need to fix.

If you have any late payments, credit lines with a balance over 30% of your credit line, or collections, try taking care of them first and give your credit score a month or two to improve before applying.

>> More: How to Prequalify for a Personal Loan

#2. Make Sure You Can Qualify for a Bank Loan

Don’t just assume you’ll qualify for a bank loan. While each bank has different loan qualifying requirements, you should have at least a 680-credit score and a debt-to-income ratio lower than 40%. This means your total monthly debts (including the new loan) take up less than 40% of your income.

If you aren’t sure what banks require, you can get pre-approved. It usually doesn’t hurt your credit since banks don’t do a hard credit check until you choose the loan and move forward with it. Getting pre-approved can tell you if your qualifying factors are good enough and what rate/terms you might get.

If you don’t like what lenders have to say, you can improve your qualifying factors and try again to keep your costs as low as possible.

#3. Compare Bank Loan Rates

Like each bank has its qualifying requirements, they also charge their rates. It’s a good idea to get rates from several banks. It doesn’t hurt your credit, and it gives you a chance to determine which loan is right for you.

Compare each bank’s APR, which includes the rate and the fees. Using a loan calculator, you can determine the total interest you’d pay for each loan to decide which one is right. Pay close attention to the terms too. Don’t assume that a lower rate is better. If it has a longer-term, you’ll likely pay more interest in the end.

>> More: See the Best Personal Loans

#4. Gather Necessary Documents

The bank will ask for certain documents to prove you can afford the loan. They must be able to prove your identity, employment, assets (if applicable), and your liabilities. They can get a lot of the information from your credit report, but they’ll likely ask for proof of certain factors.

Be ready to provide:

  • Paystubs or W-2s
  • Tax returns
  • Asset statements
  • Current liability statements
  • Proof of employment

#5. Apply for the Bank Loan Online or In-Person

It’s time to apply when you’ve chosen the loan with the best APR and terms. Today, most banks offer an online option, but some banks or credit unions require an in-person application, especially if it’s for a high loan amount.

The application is usually simple, and once you complete it, you’ll provide your qualifying documentation to back up the data you provided on the application.

>> More: Should You Get a Loan Online or at a Bank?

#6. Sign the Bank Loan Agreement

Once the bank completes the underwriting of your loan, they’ll provide you with a loan agreement. Read it carefully to understand the fine print, including the loan’s total cost or any particulars about prepaying the loan.

You might be able to sign the loan agreement online, but some lenders prefer you to have a wet signature and come into the bank to do it.

#7. Receive Funds and Begin Making Payments

Once you sign the loan agreement, the bank can fund your loan. Some banks offer next-day or even same-day funding if you sign the agreement early enough. If not, most banks offer funding within a week.

They send the funds directly to your bank account, and you can then use them as you see fit. Once you have the funds, your payments begin. If your bank allows you to choose your payment due date, make sure it fits easily into your budget.

Some banks offer an automatic payment option too. This can alleviate the risk of missing a payment or being charged late fees.

Pros and Cons of Bank Loans

Pros:

  • You can use the funds however you want
  • Most banks fund bank loans in a matter of days
  • You don’t need a lot of documentation to get them
  • You can get pre-approved without hurting your credit

Cons:

  • Some banks charge high fees for bank loans
  • You may not be able to borrow a lot if you don’t put down collateral
  • You’ll pay late fees if you miss a payment

What Types of Bank Loans Are Available?

You can borrow money from a bank for various reasons, and sometimes you don’t even need a reason and can borrow funds.

Personal loans, for example, don’t require collateral or a reason you need the funds. They usually have the highest interest rates because of the risk the bank takes without any collateral.

Other options include auto loans to buy a car, a mortgage to buy a house, a home equity loan to borrow from your home’s equity or a business loan to expand or start your business.

>> More: Understanding the Types of Personal Loans

Alternatives to Bank Loans

Bank loans aren’t your only option. If you don’t have great credit or you don’t want to have a loan hanging over your head, here are some other options.

Online Lenders

Online lenders often have more lenient guidelines than bank loans. You may pay slightly higher APRs, but you can get a loan without perfect credit or a high debt-to-income ratio. Even if you have great credit, they can be a good option because there are so many online lenders available, you may find an even better deal than your bank offers.

Borrow Money from Friends or Family

If you’d rather not have a loan from a bank with interest and the risk of hurting your credit, consider borrowing from friends or family. You should still have a formal loan agreement with a repayment plan, and recourse should you not be able to pay, but a personal loan from friends or family won’t count against your credit or your debt ratio with future lenders.

Save Up and Pay with Cash

The ultimate way to avoid a bank loan is to save up for whatever you want to buy or invest in and pay with cash. Of course, there’s not enough time to save the full amount for things like a home and sometimes even a car, but even saving a decently sized down payment can save you money on interest charges and loan fees.

Bottom Line: How to Apply for a Bank Loan

Applying for a bank loan is simple, and you can get your funds fast. Before you do, though, make sure you understand the loan process, what you’re getting into, and make sure you can afford it. Bank loans can sometimes be easy to get, especially if you don’t need collateral but make sure it’s in your best interest and recognize the opportunity cost.

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Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.