The majority of loan applicants do not have a background in personal finance, thus they’re likely unaware of the personal loan process. Getting a personal loan involves much more than completing an application and getting a response. While most banks, credit unions and other lenders quickly respond to loan inquiries, every applicant is carefully screened to determine whether they meet the criteria for a personal loan.
1. Application Process
The application process is the first step to getting a personal loan. Applications request personal information, such as names, addresses and Social Security numbers. Other information on the application includes employment and income data. Both factors play a major role in the approval process because an applicant’s employment status and income often determines whether he can repay the loan. Banks typically ask for copies of an applicant’s most recent paycheck and they sometimes contact employers to verify this information.
2. Personal Loan and Credit
An applicant’s credit score is another determining factor in personal loan approvals. Personal loans involve lending money to cash-strapped individuals. It only makes sense for banks to screen each applicant’s credit history and assess their payment habits. Each person has three credit reports and credit scores. Banks typically pull data from at least one of the three reporting bureaus. Reports reveal detailed information, such as an applicant’s length of credit history, his number of existing debts and whether he pays his bills on time. Frequent lateness and other derogatory information (bankruptcy, foreclosure and repossession) might trigger a personal loan rejection.
3. Loan Terms
Once a lender decides that an applicant meets the criteria for a personal loan, the lender next decides the interest rate on the loan. Several factors affect the interest, such as the applicant’s credit score and the length of the loan. Lengths vary according to the borrowers needs, however, short-term loan typically justify lower rates. Lenders spell out the loan details in a loan packet and present these documents to applicants.
It is the responsibility of each borrower to read the information in the packet and ask questions on any aspect of the agreement. Borrowers should fully understand the due date, the interest rate, the monthly payment, the loan term, as well as any late penalties.
4. How Peer to Peer Lending Differs
Peer to peer lending strays a bit from the traditional borrowing model. While a person still needs to apply for the loan, answer questions about their intentions and go through a credit check, things are a bit more flexible.
First of all, when applying for a peer to peer loan the money comes from investors. Not a bank or credit card company. These investors, your peers, put up the cash to fund your loan.
Based on your credit score and the amount of your loan, you will be assigned a fixed rate and over the agreed upon term, the borrower makes monthly payments that are dispersed back to the investors. As a borrower, you can work to adjust the interest rate of your loan by changing the amount requested.
Once you are done with the preliminary work, you simply put your request out in front of the investors and watch the funds roll in.