A Quick Guide to the Loan Approval Process

Are you wondering how long it will take to get your loan approved? Here's a quick guide to the loan approval process to help you out.


Do you want to drive a car? Own a home? Attend college? Consolidate your debt? Finance your wedding?

If you answered “yes” to any of these questions, chances are, you will need to apply for a loan at some point. If you do, don’t feel bad; over half of Americans state that they’ve taken out a loan at some point in their lives.

When you do decide to get a loan, what can you expect from the loan approval process? Here’s a step-by-step guide that will show you what you can expect at each stage while you try to get your loan approved.

Decide on the Amount You Need

Your first step before applying for a loan should be to decide on the amount that you need. In situations where you’re purchasing something with your loans like a car, home, or college education, the amount gets pre-determined by what you wish to buy. You’ll obviously need a much larger loan for a massive mansion compared to a fixer-upper.

However, if you’re applying for a personal loan to consolidate your debts or finance a large expense like a wedding or a vacation, you need to budget. Take a close look at how much you’ll need to cover your expenses, and try to cut anything unnecessary. You don’t want to get saddled with too much debt too fast.

Submit a Request for Pre-Approval

Once you’ve decided on the product you want to buy or the amount you need, it’s time to submit requests for pre-approval. Pre-approval isn’t a formal application for a loan or line of credit. Rather, it’s a chance to ask lenders if they might be willing to loan you money, and what rates you might be able to receive.

Since pre-approvals don’t conduct a hard credit check, you can feel free to shop around to get the best tentative rates and amounts. However, keep in mind that pre-approval offers don’t always go through exactly as planned. If the lender discovers more information about your financial status during your actual application, it could lead to higher rates, lower amounts, or even complete denial.

When you receive notifications in the mail regarding home loan pre-approval or personal loan pre-approval, keep in mind that it’s just that: A pre-approval. It’s not a guarantee of funds.

Apply for the Loan

Once you’ve found the best pre-approval limits and rates, it’s time to apply for the loan itself. Where we recommended shopping around for pre-approvals, we do not advise submitting as many loan applications as possible. In fact, we advise that you try to apply to as few lenders as possible.

Each time you apply for a loan, you let a lender pull your credit report. When you have too many hard inquiries on your credit report in a short time span, it can tank your credit score just as much as not paying your bills. So, try to narrow your options down to the top three, at most.

The Lender Reviews Your Application

Once you’ve submitted your application for loan approval, the lender takes some time to review the details of your application and assess the risk that lending to you may pose. Lenders weigh a variety of different factors in determining how risky of a debtor you are, including employment, income, other debts, and your credit score.

This process is also known as underwriting in the financial and insurance sector. Different lenders have different standards they expect to be upheld. While some might only care about your income and credit score, others will outright contact listed places of employment to verify that you work there.

Generally, the higher the amount you apply for, the stricter you can expect the application process to be.

The Lender Gives You the Results of Your Application

After some time to deliberate their risk rating factors, the lender gets back to you with the results of your application. For some lenders, especially nowadays, your results may be instant. This tends to hold true if you’re in good credit standing and likely to get approved.

However, if your credit situation is more complicated, then the lender may request further information or verification from you. This can delay your final results or even result in a denial if you refuse to give the information requested. If your loan application results in a denial, you will more than likely receive a notice in the mail within a few weeks explaining the reasoning behind your denial.

What Can Cause Lenders to Deny You?

So, you submitted an application for personal loan approval and come back empty-handed. What gives? Why did the lender turn you down, even though you’re positive that you would pay back what you owe?

Sadly, lenders can’t afford to take you at your word. “I’ve got you the next time I see you” doesn’t fly when you’re dealing with thousands of dollars. So, what can cause your application to get denied? The main factors include:

Poor Credit Score

If you want to get approved for a loan with any kind of decent interest rate, or approved at all, you need a credit score at least in the six hundred range. If it’s below that, you may need to pursue lenders that specifically cater to those with bad credit or opt for a secured loan.

Factors that can affect your credit score for the worse include:

  • Maxed out credit cards
  • Unpaid bills and debts
  • Bankruptcy
  • Too few accounts

If you struggle with any of these issues, then you need to try and resolve them before you apply again.

High Debt to Income Ratio

If you owe tens of thousands of dollars but struggle to bring in twenty thousand a year, lenders will raise some eyebrows. Even if you’re meeting your minimum payments, your burden of debt massively exceeds your income. They won’t want to risk lending you more money and not getting their due.

Lack of Employment History

This comes into play far more during the mortgage pre-approval process, but your employment history can factor into your ability to get a loan. If lenders see that you’re inconsistent in your employment, they may reasonably assume that this inconsistency transfers to other areas of your life as well. Plus, inconsistent employment could affect your ability to make on-time payments, which is a risk they won’t want to take.

Lack of Credit History

Sometimes, not having any credit history can be as harmful as having poor credit. If lenders have no prior information to base their decision on, trusting in you to repay the amount loaned is a massive risk. More careful lenders or loans with higher amounts may decide to look elsewhere if they can’t be certain that you’ll pay what you owe.

How Can You Improve Your Chances for Loan Approval?

Now that you understand what factors can cause a potential lender to deny you, let’s discuss how you might improve your chances for loan approval. Some ways that you can help yourself in this regard include, but are not limited to:

Repair Your Credit Score

The higher the credit score, the more likely you are to get approved, the lower your interest rates will be, and the higher your loaned amounts can become. So, if you’re finding every lender’s door slammed in your face, it’s time to dig deep and repair your credit score. Some actions you can take to improve this factor are:

  • Keeping your cards paid off
  • Paying your bills on time
  • Diversify the account types you have

By repairing your credit score, you can then get approved more often and for better loans than you could before.

Pay Down What You Owe

If the issue is your debt-to-income ratio, the most obvious way to increase your loan approval odds is to pay down the amount that you owe others. By reducing your level of debt, you also reduce your debt-to-income ratio. This makes it easier for lenders to trust that you’ll have the money you need to pay what you owe.

Hold Down a Steady Job

If you can hold down a steady job for a year or more, this shows lenders that you’re capable of being consistent and that you’re not likely to flake on payments. Try to hold out at your current position for as long as you can before applying for a loan to increase your approval odds.

Types of Loans You May Need in Your Lifetime

Lastly, let’s review the types of loans that you may need during your lifetime. The most common types include personal, student, home, and auto loans. However, you may also want debt consolidation loans, designed to help you combine your debts. Or, if you get furniture from a warehouse, you may need an installment loan.

Let’s Review the Loan Approval Process

No matter what type of loan you need, the loan approval process is the same. You determine your budget, then reach out for pre-approval. After that, you submit your application, the lender reviews it and will either extend the loan or deny it. If you need further information on how the process of getting a loan works, check out our blog each day for more helpful financial articles like this one.