A Step-by-Step Guide on How to Get a Bank Loan

There are different types of Canadian loans, such as a personal loan vs. a line of credit or a mortgage vs. home equity loan, and securing a bank loan can be crucial in achieving your financial goals. Whether you are starting a business, building credit with a personal loan, buying a home, or covering unexpected expenses, a bank loan can help you reach these milestones.

However, navigating the loan application process can feel overwhelming, especially if you're unfamiliar with the requirements and procedures.

Get a clear, step-by-step approach to getting a bank loan. We'll cover everything from understanding your loan options to strengthening your application, along with expert tips and advice to increase your chances of approval.

Whether you're a first-time borrower or looking to refine your approach, this guide will equip you with the knowledge and confidence you need to secure the financing you require.

Understanding Personal Loans

What is a Personal Loan?

A personal loan is an unsecured loan that allows you to borrow a fixed amount of money from a bank, credit union, or online lender, which you repay in monthly installments over a set period. Unlike secured loans, such as mortgages or auto loans, personal loans do not require collateral, meaning you don't have to put up an asset like your home or car as security. This makes them an attractive option for individuals who need funds for various purposes, such as debt consolidation, home improvements, medical expenses, or even unexpected emergencies.

Personal loans typically come with fixed personal loan rates, meaning your monthly payments remain consistent throughout the loan term. The amount you can borrow and the loan interest rate you're offered generally depends on your credit score, income, and overall financial profile. Because they are unsecured, personal loans may have higher interest rates than secured loans. Still, they offer the flexibility to use the funds as you see fit without tying them to a specific purchase or asset.

Preparing for a Personal Loan

When you're considering applying for a personal loan, preparation is key to ensuring a smooth application process and increasing your chances of approval. Two crucial steps in this preparation are knowing your credit scores and gathering the required documents.

Know Your Credit Scores

Before you start the loan application process, it's important to understand your credit scores. These scores are vital in determining whether you'll be approved for a loan and the interest rates and terms offered. Your credit scores are based on your credit history, including your payment behaviour, total debt, length of credit history, and types of credit accounts.

Check your credit scores with the major credit bureaus—Equifax, Experian, and TransUnion. Reviewing your scores will give you a sense of where you stand in the eyes of lenders.

Additionally, ensure there are no errors or discrepancies on your report that could negatively impact your scores. If you find any inaccuracies, address them promptly by filing disputes with the credit bureaus.

If your credit scores are lower than desired, consider improving them before applying for a loan. Making timely personal loan payments, avoiding new credit inquiries, and paying off your loan have credit impacts and can help boost your scores, leading to better loan offers and terms.

Choosing the Right Loan Option

There are some risks of personal loans for Canadians depending on your situation. Selecting the right loan option is crucial to securing financing that aligns with your financial goals and ability to repay. With various types of loans available, it’s essential to compare your options and consider factors like interest rates, loan terms, and payment flexibility. This section will help you navigate these choices and find a loan that best suits your needs.

Comparing Loan Options

When choosing a personal loan, you’ll likely encounter different types of loans from various lenders, each with its terms and conditions. Here’s how to effectively compare your loan options:

1. Interest Rates: The interest rate is one of the most important factors to consider, as it determines the total cost of the loan. Compare the annual percentage rates (APRs) offered by different lenders, which include both the interest rate and any fees. Lower APRs generally mean lower overall costs.

2. Loan Amounts: Different lenders offer varying loan amounts. Ensure that the lender you choose can provide the amount you need. Additionally, consider whether you need the full amount you're eligible for, as borrowing more than necessary can lead to higher interest payments.

3. Loan Terms: The loan term is the period over which you’ll repay the loan, typically from one to seven years for personal loans. A longer term means lower monthly payments, but you’ll pay more interest over time. Conversely, a shorter term results in higher monthly payments but less interest paid overall.

4. Fees and Penalties: Be aware of any fees associated with the loan, such as origination fees, prepayment penalties, or late payment fees. Some lenders charge an origination fee upfront, which can reduce the amount you receive from the loan. Prepayment penalties may apply if you pay off the loan early, so choose a lender that doesn’t penalize you for early repayment if that’s your plan.

5. Lender Reputation: Research potential lenders by reading customer reviews and checking their reputation with organizations like the Better Business Bureau. A lender with a solid reputation is more likely to offer transparent terms and good customer service.

6. Secured vs. Unsecured Loans: Decide whether you prefer a secured loan or an unsecured loan. Secured loans might offer lower interest rates, but you risk losing your collateral if you default.

Flexible Terms and Payment Options

Flexibility in loan terms and payment options can significantly impact your loan experience and overall financial health. When evaluating loan options, consider the following aspects of flexibility:

1. Customizable Loan Terms: Some lenders let you choose your loan term within a certain range, allowing you to customize your monthly payments and interest costs. This flexibility gives you a balance between affordable payments and minimizing interest.

2. Payment Frequency: Check if the lender allows you to choose your payment frequency—monthly, bi-weekly, or weekly. More frequent payments can reduce the overall interest paid on the loan, as they decrease the outstanding balance more quickly.

3. Automatic Payments: Many lenders offer a discount on the interest rate if you set up automatic payments from your bank account. Automatic payments can also help you avoid late fees and ensure your payments are made on time.

4. Payment Adjustments: Some lenders offer flexible payment options, such as the ability to defer a payment, make additional payments without penalty, or temporarily reduce payments during financial hardships. This can be a valuable feature if your financial situation changes unexpectedly.

5. Early Repayment Options: Ensure the lender allows for early repayment without penalties. Paying off your loan early can save you money on interest, so it's advantageous to choose a loan that doesn't penalize you for doing so.

Applying for a Loan

When you're ready to apply for a loan with a financial institution, like a bank or credit union, it's important to be thoroughly prepared. This ensures that your application is complete and stands the best chance of being approved. Two key steps in the application process are submitting the loan application and preparing for a credit check.

Submit the Loan Application

Submitting your loan application is a critical step in the process, as it formally initiates your request for financing. Here’s how to ensure your application is thorough and accurate:

1. Complete the Application Form: Most lenders will require you to fill out a detailed application form, either online or in person. This form typically asks for personal information, such as your name, address, and Social Security number, as well as details about your employment, income, and the loan amount you’re seeking.

2. Double-Check Your Information: Accuracy is key when filling out your loan application. Double-check all the information you’ve provided to avoid any mistakes that could delay the process or lead to a rejection. Ensure that all names, numbers, and addresses are correct and that any supporting documentation matches the details in your application.

3. Include All Required Documents: Along with your application, submit the required documents, such as proof of identity, income, and employment. Ensure you’ve gathered and included all the necessary paperwork to avoid delays. Refer to the lender’s checklist, if provided, to confirm that you have everything ready.

4. Provide Additional Information: Some lenders may require additional information or documentation specific to your situation. Be prepared to offer explanations for any potential red flags, such as gaps in employment or recent changes in income. This proactive approach can help preempt any concerns the lender might have.

5. Submit Online or In-Person: Depending on the lender, you may have the option to submit your application online, in person at a branch, or via mail. Online applications are typically faster and more convenient, while in-person submissions allow for direct interaction with a loan officer who can answer any questions you might have.

6. Follow-Up After Submission: After you submit your application, keep track of its status. If you haven’t heard back within the expected timeframe, follow up with the lender to confirm that your application was received and to inquire about any additional steps.

Prepare for a Credit Check

A credit check is a crucial part of the loan application process, as it provides the lender with an assessment of your creditworthiness. Here’s how to prepare for this step:

1. Understand the Impact: When you apply for a loan, the lender will conduct a hard inquiry on your credit report, which can temporarily give you a low credit score. While this impact is usually minor, it’s important to be aware of it, especially if you plan to apply for multiple loans or other forms of credit in a short period.

2. Review Your Credit Report: Before submitting your application, obtain a copy of your credit report from the major credit bureaus. Review it for any errors or discrepancies that could affect your credit score. If you find any inaccuracies, dispute them with the credit bureau to have them corrected before your credit check.

3. Know Your Credit Score: Familiarize yourself with your current credit score so you can anticipate the lender’s response as you may not be able to get a personal loan with bad credit. If your score is lower than expected, consider taking steps to improve it before applying, such as paying down debt or resolving any outstanding issues.

4. Be Prepared to Explain: If there are any negative items on your credit report, such as late payments or a high credit utilization ratio, be ready to explain these to the lender. Providing context, such as a temporary financial hardship or a plan to pay down debt, can help mitigate the impact of these factors.

5. Limit Additional Credit Inquiries: During the loan application process, avoid applying for new credit cards or loans, as each application results in a hard inquiry on your credit report. Multiple hard inquiries in a short period can lower your credit score and raise concerns for the lender.

6. Stay Organized: Keep all the documentation related to your credit history, such as credit reports and correspondence with the credit bureaus, in one place. This organization will make it easier to address any issues that arise during the lender’s review of your credit.

Build Credit with KOHO and Secure a Favourable Loan

Building a strong credit profile is essential for securing favourable loan terms, and KOHO provides a range of tools to help you achieve this goal. With KOHO's spending and saving plans, you can manage your finances efficiently while working towards improving your credit score.

The KOHO virtual credit card allows you to make secure online purchases, helping you build a history of responsible credit use. Additionally, KOHO's overdraft protection coverage ensures that you avoid costly fees, and a free credit score gives you insights into your credit profile, further supporting your financial stability.

KOHO also offers a High-Interest Savings Account (HISA), which not only helps you save more effectively but also demonstrates financial responsibility—an important factor when applying for a loan. By taking advantage of these tools and maintaining good financial habits, you can build your credit with KOHO and position yourself to secure favourable loan terms in the future.