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What is a Personal Loan?
A personal loan provides an upfront lump sum cash payment that the borrower repays over a fixed term, usually 2 to 7 years. Once approved and funded, the borrower receives the full loan amount minus any origination fees.
Unlike auto loans or mortgages, personal loans are unsecured, meaning no collateral is required. Borrowers can use the funds for virtually any purpose without having to specify the reason to the lender.
Some of the most common uses for personal loans include:
- Consolidating high-interest credit card balances
- Funding home improvement projects
- Paying medical expenses
- Financing a vacation
- Covering emergency costs
- Paying taxes
- Making a major purchase
- Furthering education
Benefits of a Personal Loan from a Bank
Lower Rates
Large national banks and local community banks have very competitive rates, often lower than other financial institutions. For borrowers with good to excellent credit, banks offer affordable single digit APR personal loans.
Banks want to build long-term relationships with customers across many different financial products. This motivates them to offer attractive lending rates. When you get a personal loan from an existing bank, you may even qualify for relationship discounts by having other accounts with them.
Predictable Payments
Personal loan payments remain the same over the full loan term, making it easy to budget for each monthly payment amount. Payments are structured to pay down both interest and principal every period until the loan is fully repaid.
Early payoff is also permitted with bank personal loans, so you have the flexibility to repay faster if you wish. There are no prepayment penalties.
No Collateral Required
Personal loans do not require collateral like a house, car, or savings account. This reduces risk because your personal assets remain protected even if you default on the loan.
For secured loans like auto loans, the bank can seize the car if you fail to repay. With unsecured personal loans, the bank's only recourse is reporting your default to credit bureaus.
Could Improve Credit Scores
Making all your monthly payments on time demonstrates to credit bureaus that you responsibly manage installment credit. In turn, this can gradually boost your credit score over the duration of the personal loan.
Higher credit scores qualify you for the best rates on future loans and credit cards. If improving your credit is one of your goals, on-time repayment of a personal loan from a bank helps.
Access to Physical Branches
With an established local or national bank, you have access to in-person branches for assistance. You can visit to submit applications and documentation or ask questions of branch associates if needed.
Online lenders operate purely through websites and phone systems. For customers who prefer face-to-face interactions, a brick-and-mortar bank is advantageous.
Personal Loan Eligibility Requirements
While the specific underwriting criteria varies slightly between banks, there are common eligibility standards you must meet to qualify for a bank personal loan:
Credit History and Score
- A FICO credit score of at least 670 is recommended, and scores over 700 have the best approval chances. Many banks set a minimum score threshold around 640.
- Your history of past credit accounts and payments must demonstrate responsible usage and management. Too many missed payments or defaults can disqualify an application.
Income
- A stable source of income, whether from wages, self-employment, investments, retirement, or other sources must be verifiable through tax returns, pay stubs, or bank statements.
- Most banks require a minimum individual annual income in the range of $20,000 - $30,000 or higher.
Debt-to-Income Ratio
- Your monthly debt payments, including the new personal loan, should not exceed 40% of your total monthly gross income. The lower your existing debts, the more affordable the new loan payment is.
Credit Inquiries
- Every application for new credit temporarily drops your credit score a few points. Too many recent inquiries can lessen your approval odds. Avoid applying for multiple other loans within a few months of your personal loan application.
Bank Relationship
- Having an existing relationship with the bank can improve approval chances. This demonstrates you already bank responsibly with them. However, it is still possible to get approved as a new customer to the bank.
Preparing an application that meets all these requirements takes consciousness and diligence. Rushing into the process rarely ends well. You maximize your likelihood of success by understanding eligibility criteria in advance.
How to Apply for a Personal Loan with a Bank
Applying for a bank personal loan includes gathering documents, completing applications, getting approved, accepting loan terms, and finalizing details. Here is a step-by-step process:
1. Check Credit Reports and FICO Scores
Order free copies of your credit reports from AnnualCreditReport.com and examine them for any errors. Also purchase your FICO credit scores to understand your risk profile from the lender perspective.
Scores below 670 will face more scrutiny, so take time to improve your credit first if needed.
2. Research Lenders
Search and compare personal loan offers from major national banks and local community banks. Consider places where you already bank first. Compare interest rates, fees, loan amounts, and terms side-by-side.
3. Calculate Your Loan Amount
Decide how much you need to borrow based on the purpose of the loan. Total the specific expenses and amounts required, plus a buffer. Avoid borrowing more than truly needed. (Personal Loan Calculator)
4. Gather Required Documents
Banks require proof of income, identification, and evidence you can service the debt. This includes items like tax returns, W-2s, recent pay stubs, bank account statements, and a driver's license or passport.
5. Complete the Loan Application
Your application must include personal information like Social Security Number, Date of Birth, Address, and Employment details. List all assets, liabilities, income sources, and monthly expenses accurately.
6. Wait for an Approval Decision
The lender will review your application information, verify details with your employer and other institutions, check credit reports from bureaus, and make an approval decision. This typically takes 1-2 weeks.
7. Accept the Loan Terms
If approved, the bank presents the loan offer terms including the interest rate, fees, loan amount, and repayment structure. Make sure you understand and agree to the terms before accepting.
8. Finalize Details
Provide any other requested documents to satisfy loan closing requirements. Then sign the final loan agreement contract. The bank will deposit the loan funds into your designated account.
Tips for Improving Your Chances of Approval
Using these strategies can help boost your odds of successfully getting approved:
- Maintain credit card balances below 30% of the credit limits
- Avoid applying for other loans or credit leading up to your personal loan request
- Pay all monthly bills on time and correct any issues on your credit reports
- Build your credit history by continuing to use credit responsibly
- Provide documentation neatly organized and fully complete
- Consider applying with a cosigner who has excellent credit
- Ask the loan officer questions to streamline providing any other needed verification
- Be patient! It takes diligence and perseverance, but you can get there.
The more you demonstrate responsible credit management, the more confidence a lender has in approving your application. Rushing the process rarely works. Give yourself plenty of lead time.
What to Do If You Are Denied for a Personal Loan
If your personal loan application gets rejected, here are some alternative options to consider:
- Apply with Other Lenders - Each bank has its own criteria. Try community banks or credit unions which may be more flexible.
- Improve Your Credit - Give yourself 3-6 months to increase your credit score before reapplying. Pay down balances, correct errors.
- Provide a Cosigner - Adding a cosigner with good credit can improve your chances. Make sure they understand the obligation.
- Seek a Secured Loan - Putting up collateral like a savings account allows you to get approved for a secured loan more easily.
- Borrow Against 401k - If eligible, you may be able to take a loan against your 401k balance and repay it over 5 years.
- Use a 0% APR Credit Card - A 0% interest credit card can provide financing for 12-18 months without interest if you pay on time.
- Borrow Home Equity - Tap into your home equity line of credit if you have sufficient equity available.
- Nonprofit Lenders - Nonprofit lenders provide personal loans tailored for borrowers with limited credit histories.
- Save to Buy - Tighten your budget temporarily so you can save up and make the purchase with cash.
With time and diligently building your credit, you will eventually qualify for a personal loan. Do not get discouraged if your first attempt gets denied.
Frequently Asked Questions about Personal Loans from Banks
How long does it take to get approved for a personal loan?
Plan for the approval process to take 1-3 weeks including the time it takes to submit your application, the lender review, providing supplemental documents, and finalizing the loan. Having your financial information organized speeds things up.
What is the maximum personal loan amount I can get from a bank?
Personal loan amounts range from $1,000 up to $100,000 depending on the lender and your financial qualifications. Most banks will limit your loan amount to a percentage of your annual salary, often around 40%. So higher earners can qualify for bigger loan amounts.
Can I get a personal loan with bad credit or no credit history?
It is challenging but possible to get approved with poor or no credit if you provide a cosigner, apply for a secured loan, or use a lender that offers credit-builder loans. Community banks and credit unions may offer more flexibility than major nationwide banks.
How do banks make decisions on personal loan interest rates?
The primary factors that determine your interest rate are your FICO credit score and history. Borrowers with higher scores get lower rates. Your income, existing debts, and requested loan repayment term are also part of most lender rate formulas.
Can I get a personal loan from an online bank?
Yes, many large national banks that operate primarily online do offer personal loans with competitive rates. Some top options are Capital One, Marcus, Lightstream, Discover Bank, and HSBC. The application process is completed through their websites.
Conclusion
Getting approved for a personal loan from a bank requires understanding eligibility criteria, having a good credit profile, completing applications accurately, and providing all required documentation. Comparing multiple lenders can help you find the most favorable loan terms. With some diligence and patience, you can get approved for a bank personal loan that provides affordable financing for your needs.
