One of the most confusing and frustrating aspects of loans for many shoppers is simply understanding the process to get one. There’s a ton of different financial terms you have to wade through, and one lender may do things differently than the other. Given that this is the case, it’s easy to feel discouraged about how complicated getting unsecured personal loans for bad credit seems to be.
If you’re looking for a loan, and that’s how you feel, don’t think for a second that you’re alone. Nearly every customer we’ve worked with admitted that they weren’t confident that they understood how the process works. It’s a source of trepidation for just about everyone. In this post, we’ll explore the entire lending process from beginning to end. We’ll define some essential terms that you need to know and give you a behind the scenes look at how your loan comes together. We’ll also offer some key points that you need to consider to make sure that your loan will work for you.
Outlining the Process for Getting a Loan
As I mentioned in the introduction, every lender you work with will have a slightly different process. They mainly differ in the speed they work, the information they need from you, and the rates they offer. With that being said, the way you approach the lending process as a borrower will remain fairly consistent no matter which lender you choose. In general, the process consists of four main steps:
- Preparing to Get a Loan
- Shopping for and Selecting a Loan
- The Application and Approval Process
- Paying Back the Loan
1. Preparing to Get a Loan
The first phase of the lending process doesn’t involve lenders at all but focuses entirely on you as a borrower. In this phase, you’ll need to examine your financial situation, determine your credit rating, and gather some documents you’ll probably need later in the process. This will take some time and effort on your part, but knowing where you stand will make the process flow much more smoothly for you down the road.
Pull Your Credit Report and Check it Carefully
One common mistake that many loan-seekers make is pulling only their credit score and ignoring their credit report. The reason this is a bad idea is that your credit score is determined by the information annotated in your credit report. If your report is incorrect, it could cause your score to be lower than it actually should be. Your credit score will play a huge role in whether or not you receive a loan, and what kind of rates you’ll receive. It’s critical that you start with your credit report first and ensure that it’s accurate.
You can receive one free report from each of the three credit bureaus each year. You can get all three reports simultaneously, or spread them out, by going to AnnualCreditReport.com. This is the only way to receive all three reports for free at once, as it’s established under federal law. I’d recommend you get all three at once because, at this point, you don’t know which lender you’ll use or which bureau’s report they’ll pull.
When you pull your report, you need to read it slowly and check each section thoroughly. In particular, pay attention to the following aspects:
- Ensure Your Personal Information is Accurate
- Check the Public Records Being Reported
- See What Accounts and Lines of Credit Are Being Reported
- Verify any Adverse Accounts and Potentially Negative Items You Have
- Check any Inquiries Made on Your Credit History
Ensure Your Personal Information is Accurate
Though it’s rare, there have been instances where one person’s information ended up on another person’s report. Before you check anything else, verify that your name, date of birth, social security number, current and past addresses, and employment data are correct.
Check the Public Records Being Reported
Public records on your credit report refer to any records where some kind of negative action involving finances was taken against you. Examples of these include filing for bankruptcy, a court judgment, garnishments of wages, etc. These are important because they most will most often have a huge impact on your overall credit score. The amount of time they affect your score can vary. Each of your public records should have an estimated date for removal. Typically, public records remain on credit reports anywhere from five to seven years.
If you do have a degenerate public record, especially something like bankruptcy, you may want to consider holding off on getting a loan for now. Reports like these make creditors and lenders far less likely to work with you. If they do, they’ll often charge much higher rates because you’re assessed as a higher risk. You may not be in a position to wait for years before you seek a loan, but bear this in mind as you move forward.
See What Accounts and Lines of Credit Are Being Reported
Your next step is to determine which of your accounts are being reported to the bureaus. Typical accounts reported include credit cards you have, previous loans you’ve taken out, automobile payments, and mortgages/rent payments. Typically, utility payments and cell phone bills are not reported (unless you have late/missed payments). If you find a recurring payment account not annotated, you may want to consider having it added to your report. Payment history is the number one factor in determining a credit score. If you have another source that can validate you make your payments on time, it can help raise your score.
Verify any Adverse Accounts and Potentially Negative Items You Have
These are any accounts where a late payment or lack of payment have been reported. One critical thing to understand is that just because you may be current on your account now, it doesn’t mean that your negative action won’t be reported. For example – if you missed a credit card payment one month, but paid off the entire balance including late charges the following month, your missed payment will probably still show up.
Just like with public records, these adverse accounts will have an estimated date to fall off your report. The usual amount of time these records remain on your report is seven years. If your account has been in otherwise good standing, you can contact the creditor reporting the negative item and ask to have it removed from your report early. However, there’s no guarantee they will.
Check any Inquiries Made on Your Credit History
The last thing you need to check on your credit report is any inquiries that have been made on your credit history. Typically, hard inquiries are the only ones that will be reported, though soft inquiries can as well. The difference is that hard inquiries will normally lower your score, while soft inquiries never will. If you find a hard inquiry that you didn’t authorize, you need to contact the reporting bureau and dispute the check. This doesn’t guarantee that it will be removed but if you can have it removed it needs to be.
Check Your Credit Score
Once you’ve verified that your report is completely accurate, and reported any deficiencies, then you should check your credit score. The most important thing you need to identify, besides the number, is how your score will be classified. How your score is classified will determine what kinds of loan offers you’ll receive. While the ranges vary based on who you ask, FICO is the most common scoring system used. FICO breaks down credit rankings as follows:
- Excellent: 800 – 850
- Very Good: 740 – 799
- Good: 670 – 739
- Fair: 580 – 669
- Bad: 579 and below
You want your credit score to be as high as possible before you pursue a loan. Having already identified what on your credit report is impacting your score will help you to strengthen it in the future. Though there are specific options designed for unsecured personal loans with bad credit, the best rates are normally reserved for better credit scores.
Gather the Documents You’ll Need
This may be the hardest aspect of your preparation to get right because, again, every lender is different. Some will require documents that others won’t. It’s better to be overprepared, so I would recommend you gather the following:
- At least two forms of government-issued ID – A driver’s license, visa, passport, military ID, or birth certificate are some examples
- Sources of Income – These can include banking statements, pay stubs, and tax returns
- Proof of Address – This can include a rental agreement, home title, or utility bill
- Credit Report – Normally, lenders will pull this themselves. Since you’ve already pulled yours to check it, you can see if they’re willing to accept the one you provide
2. Shopping For and Selecting a Loan
Now that you’ve made your preparations, the next step is to actually find the lender you want to work with. This step has the potential to be the most drawn out because there are so many factors to consider. However, comparing lenders is essential if you want to ensure you get the most money and pay the lowest charges.
Know These Definitions First
Before you start searching, you need to understand what the following terms mean. They’ll play a big role in determining how much money you receive, how much you pay back, and the time involved:
- Principal – The base amount of money you borrow. Alternately, it can refer to the outstanding balance you have left to pay off your loan.
- Interest Rate – This refers to what the lender charges for granting you a loan. There are two types: fixed rate and adjustable. Fixed rates don’t change. Adjustable rates do change. The interest is given in a percentage and applied to the principal.
- Finance Costs – This refers to any charges made to grant you a loan. Examples include processing fees or investigative fees. Some lenders include interest charges in financing costs but others keep them separate.
- Annual Percentage Rate (APR) – This refers to the true cost of your loan over a single year. APR is a better gauge of how much you actually pay for your loan since it combines finance costs and interest rates into one percentage.
- Loan Term – The length of time you have to pay off your debt. This can vary widely from lender to lender, from just a few weeks to several years.
Finding the Right Lender
The goal is to find a lender who will give you the amount of money you’re requesting and charge you the least for doing so. In addition, you need to verify how long it takes to fund your request and how long you’ll have to pay back your money. It’s also a good idea to check a lender’s customer service ratings. That will tell you how easy they are to work with, how willing they are to negotiate terms, and how fast they are about responding to your questions or concerns.
The Time it Takes to Find Your Lender
The biggest headache for many loan-seekers is that finding the best deal can take a long time. Forbes did a study in 2018 that found it took the average borrower between two weeks and one month of searching to find the right lender. If your loan is being used to fund something like an upcoming bill or an emergency medical cost, you may not have that much time available. There are services out there that do the shopping for you. Loans Now, for example, uses the Loan Discovery Program to match borrowers with the perfect unsecured personal loan that matches their needs.
3. The Application and Approval Process
Once you’ve selected the lender you think you want to work with, call or email them directly.
Try for Pre-Approval First
Before you start discussing hard terms with a lender, see if they have a pre-approval process available. With pre-approval, they work off the credit score and income you tell them to give you a ballpark figure of what you qualify for. These aren’t guaranteed numbers but they can give you an idea of what to expect. More importantly, pre-approval doesn’t require a hard check on your credit. If the lender won’t work with you because of your score, or the estimate isn’t close to what you want, you don’t have to waste any more time. Not all lenders provide a pre-approval process. Be wary of any lender offering guaranteed approval for an unsecured loan, as these often turn out to be scams.
Filing Your Application
Your application will contain a combination of personal, employment, and financial information. You should be able to pull all the data you need from the documents you gathered in Step 1. The lender will also discuss what kind of terms you’re looking for in a loan and what you plan to do with your money. Personal loans can be used for a wide variety of purposes, such as paying for rental charges, taking a vacation, etc. The lender wants to get a rough idea of how risky your venture will be.
A Check is Made on Your Credit
The first thing the majority of lenders will do after they get your application is to check your credit. As we discussed earlier, hard inquiries will most likely lower your score, so it’s important to limit the number of lenders you pursue. This will prevent multiple inquiries that compound the damage to your score. Lenders check your credit to gauge the risk of lending to you. That’s why higher scores yield better rates – you seem less risky.
Your Application is Checked and Underwritten
Lenders want to know that you can comfortably afford your loan repayments. To ensure that’s the case, lenders will study the application to ensure it’s complete and then underwrite the loan. Underwriting is the process of verifying that the lender will offer you a loan based on the terms you’ve requested.
Paramount to this process is ensuring that you can actually afford your loan repayments. Your pay stubs, W2s, and other income documents will be checked to determine your DTI, or debt-to-income ratio. Typically, if your DTI is 43% or less, agencies won’t have a problem working with you. This process can take anywhere from a few days to two weeks with traditional lenders.
Approval and Funding
If everything checks out, you’ll receive approval, and you’ll then sign the contract to receive your loan. Your loan will be typically be deposited as a lump sum into your bank account. At this time, you’ll also pay any origination fees associated with your loan. The delay between getting approval and receiving your money can be as little as a day or up to several weeks, depending on the lender.
4. Paying Back the Loan
The final step in the lending process is actually paying back your loan. Your minimum monthly payment will be calculated and presented to you when your request is approved. When you actually have to start paying depends on the lender. Some will give you up to a month before your first payment is due, while others will expect it almost immediately.
As part of your loan agreement, some lenders may charge what’s called a payoff penalty. This is a charge applied to your account if you pay off your loan before the agreed due date. Some lenders will charge this fee because if you pay early your APR stops accumulating and they lose money. Others, like the partners we work with, never charge payoff penalties. If you can pay back your debt, without incurring additional charges, then you definitely should!