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 they will lend you and at what interest rate.

Applicant requirements

Some banks only offer loans to their existing 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, it’ll be in your best interest to borrow from a bank in which you already have an account, especially if you’re in good standing with the bank. You may earn a lower annual percentage rate (APR) and other added perks, like 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’ll need to meet the eligibility requirements listed by the bank or credit union to which you’re applying. Here are the main factors a bank will consider:

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

A bank needs to feel confident that you’ll be able to repay the loan.

Your credit score will play an especially huge part when applying for a bank loan, both for approval and to determine how much interest you’ll pay over the life of the loan. Every 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.

Loan Type Credit Score
Personal loan¹ 640 and above

760 and above for the lowest interest rates

Auto loan² 660 and above

760 and above for the lowest interest

Mortgage³ 620 and above

760 and above for the lowest interest rates

Private student loan4 650 and above

721 and above for the lowest interest rates

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

Application process

You’ll typically be able to apply online or in person for a bank loan. The application will ask for your personal and financial information, including your current and past addresses, Social Security number, employer, and income details.

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

Associated costs

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

Some of the main costs you should consider include:

  • Interest: The most common types of interest rates will be fixed or variable.
  • Arrangement fees: The lender charges an arrangement fee for setting up the loan. Arrangement fees usually pertain to mortgages or business loans.
  • Insurance: Purchasing 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 charges these fees when your loan is approved, as a percentage of the amount you borrow.
  • Application fee: Some lenders might charge a fee to apply.
  • Late fee: A lender might charge a fee for late loan payments.

Repayment process

If your bank loan is an installment loan, you’ll 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 more quickly, you can make extra payments to the principal of the loan. Any extra payments toward the 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.

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