How Do Bank Loans Work? Steps, Costs and Requirements
Bank loans follow a standard process: You apply, get reviewed for creditworthiness, receive a lump sum if approved and repay with principal and interest over a set term.
Loan type shapes your rate and risk: Secured loans like mortgages, auto loans and home equity loans offer lower rates but put your collateral on the line. Unsecured options like personal and private student loans rely on your credit.
Run the numbers before you apply: Check your credit report, pay down existing balances to lower your debt-to-income (DTI) ratio, prequalify with multiple lenders and review the rates, origination fees and prepayment penalties before signing.
A bank loan is money you borrow from a bank or credit union. You agree to repay the loan in fixed payments over a set period. Below you'll find the steps, a cost example with real numbers and tips to improve your approval odds.
Here’s a five-step overview of how it works:
You apply for the loan: You submit an application with your identity, debt and income information.
The financial institution reviews your application: The bank or credit union will take a look at your creditworthiness.
The bank approves the loan: The bank will release a lump sum payment.
You repay the loan: You make monthly loan payments covering the principal and interest.
Make all payments: Once the last payment is made, the loan closes.
Lenders consider several factors when determining eligibility. Here's what you can generally expect:
Credit score: Many lenders look for a score from 580 to 740 or more, depending on the loan and lender. Approval is not guaranteed.
DTI ratio: The DTI is usually under 36%.
MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms and fees from different lenders and choose the best offer for you.
How the Bank Loan Process Works
Getting a bank loan is straightforward. Here's how it works:
Check your credit and budget: Determine your credit score. You can check your credit reports from all three bureaus for free through AnnualCreditReport.com. This takes just 10 to 15 minutes. Also, estimate your current budget to see if it’s practical to take on a loan.
Compare lenders and prequalify: You can shop around and see what rate you'll prequalify for. You'll need your Social Security number, estimated income and your loan amount. It may take 10 to 15 minutes to prequalify for your loan.
Gather your documents: Gather your ID, your pay stubs and your bank account details. Depending on how accessible your pay stubs are, this step should take 15 to 30 minutes.
Submit your application: You can submit your application to your lender. They'll pull your credit, and some lenders may charge an application fee. This process should take 15 to 20 minutes.
Review and accept your loan: Review your annual percentage rate (APR), monthly payment and total interest. Check if there's an origination fee. This process should take 10 to 15 minutes.
Get your funds: This should take one to two business days once you've provided bank account information.
Types of Bank Loans
Take a look at some of the most common types of bank loans below. Terms and details change with the market, so check current rates with the lender before you apply.
Loan type | Secured or unsecured | Best for | Term length | When it makes sense |
|---|---|---|---|---|
Personal loan | Unsecured | Debt consolidation, medical bills | 1 to 7 years | You need fast cash without collateral |
Auto loan | Secured | Buying a vehicle | 2 to 7 years | The rate is lower and tied to the car |
Mortgage | Secured | Buying a home | 15 to 30 years | You're purchasing property long term |
Home equity loan | Secured | Home improvements | 5 to 20 years | You have equity and want a lower rate |
Business loan | Both | Business expenses | 1 to 10 years | The return outweighs the borrowing cost |
Private student loan | Unsecured | Education costs | 5 to 15 years | You've used federal aid first |
Personal Loans
The funds from a personal loan can be used to cover almost any purchase. You might use the funds for debt consolidation, medical bills, home repairs, celebration expenses and more. Although many personal loans are unsecured, some personal loans require collateral.
Auto Loans
An auto loan can be used to purchase a vehicle. Typically, an auto loan is secured by the vehicle you purchase with the funds.
Mortgage Loans
Banks offer mortgage loans to help a borrower pay for a home purchase. Typically, these large loans come with loan repayment terms of 15 to 30 years with either fixed or adjustable interest rates. Your home serves as the underlying collateral, which means if you cannot keep up with the mortgage payments, the bank might foreclose on your property.
Business Loans
Many banks offer business loans to both small and large businesses for any number of business expenses. Depending on the situation, the loan might be secured by business assets or unsecured.
Student Loans
Some banks offer private student loans to help students pay for educational expenses, like tuition, books and living expenses. Unlike federal student loans, private student loans don't offer attractive borrower protections, like student loan forgiveness or income-based repayment options.
Home Equity Loan
These types of loans are a secured way to get financing for expenses like home improvements. You can get much lower rates than an unsecured personal loan and use your home as collateral.
What Happens After You Apply for a Bank Loan?
Once you have submitted your application, the bank will review your information and decide whether to approve your installment loan. Although the process varies by lender, here's what you can generally expect:
Application review: The bank reviews the information you submitted, including income, employment, credit history and loan purpose.
Credit evaluation: Banks will review your situation, including looking at your credit score, financial history and DTI ratio.
Loan approval or denial: Depending on the evaluation, the bank will approve or deny your loan request. It may also request more information before making a decision.
Loan terms and agreement: If approved, the bank will send documents outlining your loan terms, interest rates, repayment period and fees. Review this information carefully before moving forward.
Loan disbursement: Once you accept the loan, the funds might be disbursed as a lump sum or line of credit.
Loan repayment: You'll start making payments based on your loan terms. In many cases, you'll make regular monthly payments covering principal and interest. Check for prepayment penalties if you plan to repay the loan early.
Secured vs. Unsecured Loans: What's the Difference?
Loans can be secured — attached to collateral like a car — or unsecured. When you have a secured loan, the lender can seize the asset if you don't keep up with your scheduled payments.
The table below outlines the differences between secured and unsecured loans.
Feature | Secured loan | Unsecured loan |
|---|---|---|
Examples of collateral | Vehicle, house, savings | None |
Easier to get approved for | Easier — since collateral is offered | Harder — lender is taking more of a risk |
How rates compare | Lower — starts at 5% to 10% | Higher — 8% to 36% |
What happens if you can't repay | You lose your collateral | Late fees, negative impact to your credit and possible collections if unpaid |
Best for | Those who have lower credit scores | Those who have good to excellent credit |
Good To Know
Unsecured loans don't need collateral, but they often cost more and can be harder to qualify for.
Factors That Affect Loan Approval
When it comes to getting approved for a bank loan, many factors come into play. Below is a look at some of the most important factors:
Credit score: Typically, borrowers with higher credit scores enjoy lower interest rates and better approval chances.
Income and employment: Most lenders prefer to work with borrowers who have stable incomes to support loan repayment.
DTI ratio: Your DTI reflects how much of your monthly income is consumed by your current debts. Ideally you want a DTI lower than 36%. In general, a lower DTI indicates more bandwidth to repay the loan. The formula for DTI is monthly debt ÷ monthly income. If you pay $1,500 in debt each month and earn $4,500, your DTI is 33%.
Collateral: Depending on the loan, you may or may not need to provide collateral. Typically, providing collateral leads to better approval odds.
How To Improve Your Chances Before Applying
Pay down your credit cards as much as you can: This will lower your DTI ratio.
Hold off on new debt: A new account or hard inquiry may lower your credit score.
Increase income if possible: If you can find a side hustle to earn money, this could help your DTI.
Does Applying for a Bank Loan Hurt Your Credit?
It can, depending on the type of credit check.
Many lenders let you prequalify with a soft credit check, which doesn't affect your credit score. You can use it to preview your rates and terms.
When you submit a formal application, the lender usually runs a hard credit check. A hard inquiry may lower your score a little.
To limit the impact, prequalify first and apply only for the offer that fits your budget. Each lender sets its own rules, and approval is not guaranteed.
How Much Your Loan Actually Costs: Quick Example
If you have a $10,000 loan with a 12% APR for 36 months, how much would it cost?
Monthly payment: Around $332
Total interest paid: Around $1,950
Total repayment: Around $11,950
What if you added a 5% origination fee to the same loan?
Origination fee: $500
Amount received: $9,500
Loan principal: $10,000
Total interest and fees: Around $2,450
How much will you save if you pay the loan off early, if allowed?
If there are no prepayment penalties and you pay the loan off in 24 months instead of 36 months, you’d pay about $1,300 in interest instead of about $1,950. That's roughly $650 in savings.
Bank Loan Alternatives to Consider
A bank isn't your only option.
Online lenders may fund faster and review a wider range of credit profiles, but rates and fees can differ, so compare the APR and any origination fee.
Credit unions are member-owned and may be more flexible with borrowers, though you usually need to join first.
For smaller costs, a 0$ intro APR credit card, a payment plan from a retailer or a loan from family may also work, depending on your situation.
Whichever route you take, compare the total cost of the loan, not only the monthly payment.
Is a Bank Loan Right for You?
Whether or not a bank loan is right for you depends on your situation. Before applying for a bank loan, do your research and assess your budget to confirm you can support the ongoing payment.
If you can afford the payments and the loan fits into your long-term financial goals, then a bank loan might be right for you.
If you aren't sure how you'd swing the monthly payment, then a bank loan might not be right for you.
Key Terms
APR: APR is the yearly cost of borrowing money, including interest and some loan fees, shown as a percentage.
DTI ratio: DTI compares your monthly debt payments to your gross monthly income to show how much of your income already goes to debt.
Collateral: Collateral is something you own, like a car or house, that secures a loan and can be taken by the lender if you don’t repay.
Secured loan: A secured loan is backed by collateral, which can help you qualify for a lower rate but puts your asset at risk.
Origination fee: An origination fee is an upfront charge some lenders take from your loan amount for processing and funding the loan.
Sources
Consumer Financial Protection Bureau: What is the difference between a loan interest rate and the APR?
Consumer Financial Protection Bureau: What is a debt-to-income ratio?
Consumer Financial Protection Bureau: Differentiating between secured and unsecured loans
Consumer Financial Protection Bureau: What is a Truth-in-Lending disclosure for an auto loan?
Sarah Sharkey contributed to the reporting for this article.
Photo Credit: Rob Daly / Getty Images
Parts of this article were created with AI assistance. MoneyLion editors reviewed, fact-checked and edited the final version and are responsible for its accuracy.
FAQs
It depends on the loan and lender. Many lenders look for a score of at least 580 for a personal loan, though a score closer to 670 may help you avoid much higher rates. Banks may set higher minimums, and approval is not guaranteed. Prequalifying can show where you stand without a hard credit check.
It depends on the lender and loan type. Approval can take a couple of hours or several weeks, depending on your situation. Online applications may move faster, while a larger loan may need more review. Having your ID, pay stubs and tax information handy may help.
Some banks work with borrowers who have bad credit. But others won't. If you want to get a bank loan with bad credit, shop around to find a lender willing to work with you.
A fixed interest rate remains the same over the life of the loan. A variable interest rate can change over the life of the loan.
Some banks impose prepayment penalties on borrowers who repay their loans ahead of schedule. Others don't. Read the fine print of a loan document before signing to find out about potential prepayment penalties.
Most banks ask for proof of identity, pay stubs and tax information. Some may also ask for your bank account details. Requirements vary by lender and loan type, so check the list before you apply. Having your documents ready may help you finish the application faster.
It depends on the loan type. A personal loan may fund in one to two business days, while an auto loan may take about one day. A mortgage can take much longer, often 30 to 45 days. Timing also depends on the lender and how quickly you send your documents.
You can expect an origination fee, late fees and, in some cases, an application fee. An origination fee is an upfront charge that's often taken out of your loan amount, so you may receive less than you borrow. Check the fee schedule in your loan agreement before you sign.
You may like
On this page
Disclosures
MoneyLion does not provide, own, control or guarantee third-party products or services accessible through its Marketplace (collectively, “Third-Party Products”). The Third-Party Products are owned, controlled or made available by third parties (the "Third-Party Providers"). Should you choose to purchase any Third-Party Products, the Third-Party Providers’ terms and privacy policies apply to your purchase, so you must agree to and understand those terms. The display on the MoneyLion website, app, or platform of any of a Third-Party Product or Third-Party Provider does not-in any way-imply, suggest, or constitute a recommendation by MoneyLion of that Third-Party Product or Third-Party Financial Provider. MoneyLion may receive compensation from third parties for referring you to the third party, their products or to their website.
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, MoneyLion does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information. For more information about MoneyLion, please visit https://www.moneylion.com/terms-and-conditions/.