What are bank loans and how do they work?

When you apply for a bank loan, the bank will review your application, credit score, history, and income to determine how much money to lend you and at what interest rate.

Applicant Requirements

Some banks only offer loans to their current customers. Others will accept loan applications from any borrower (existing customer or not). Check beforehand to make sure the bank can offer you a loan.

In some cases, you may want to get a loan from a bank where you already have an account, especially if you have a good reputation with the bank. You can get a lower annual percentage rate (APR) and other additional benefits, such as a rate discount.

Building credit will help you apply for mortgages and other loans in the future.

Eligibility Requirements

To qualify for a bank loan, you must meet the following eligibility requirements listed by the bank or credit union to which you are applying. These are the main factors that a bank will consider:

• personal credit history
• credit score
• debt to income ratio
• payment history

A bank needs to feel confident that it will be able to repay the loan.

Your credit score will play an especially important role when applying for a bank loan, both for approval and in determining how much interest you’ll pay over the life of the loan. Each lender will have their own credit score requirements, but in general, you can refer to the table below to help you determine your credit score eligibility for these types of loans.

Pro Tip: If your credit score falls further into the fair or low range, you may be better off applying for a loan through a credit union or online financial institution. These lenders tend to have looser credit score requirements, lower interest rates, and flexible repayment terms.

application process

You can usually apply for a bank loan online or in person. The application will ask for your personal and financial information, including your current and former addresses, Social Security number, employer, and income details.

Once you submit your application, the bank will review your application and your credit history to determine whether to approve you for a loan. If approved, the lender will send you the funds and details of the terms of your loan.

Associated costs

Depending on the type of loan and the lender, there will be additional costs. In addition to interest on the amount owed, a borrower may also have to pay origination fees, insurance, application fees, and other fees.

Some of the major costs to consider include:

• Interest: The most common types of interest rates will be fixed or variable.
• arrangement fees: The lender charges an origination fee to set up the loan. Arrangement fees generally refer to mortgages or commercial loans.
• insurance: The purchase of insurance may be a condition of some loans, while others offer it as an optional add-on.
• origination fee: Origination fees are paid to a lender to process a loan application. The lender collects these fees when your loan is approved, as a percentage of the amount you borrow.
• application fee: Some lenders may charge an application fee.
• late fee: A lender may charge a fee for late loan payments.

refund process

If your bank loan is an installment loan, you will make monthly payments on a predetermined schedule. These payments will be the same amount each month, but if you want to pay off your loan faster, you can make additional payments toward the principal of the loan. Any additional payments toward principal will reduce the amount you pay in interest over the life of the loan.

For a personal line of credit, you’ll have variable interest payments based on your current balance, and your monthly payments may vary.