The Lowdown on Loans

The specific process used to evaluate loan applications will vary by lender, but some of the most common criteria considered in loan approvals include the following:

• Credit score: The higher your credit score, the lower your loan interest rates will likely be. In addition, many lenders and loan types may have minimum credit scores that must be met to qualify for financing. 
• On-time payment history: A track record of on-time payments will factor into your credit score, but it could also give lenders pause if you show a tendency to miss payments—especially if some of those late or missed payments have occurred recently.
• Income: Your debt-to-income ratio will be a factor for most loan applications. Lenders want to be confident that your current income will allow you to afford whatever payments you’re about to take on upon approval of your loan.
• Loan collateral: In cases where collateral is used to secure the loan, the lender may seek out verification of that security’s value. This is common for homes and vehicles but may be relevant to other types of loans as well.

In addition to comparing the rates offered by different lenders for a particular type of loan, it’s important to determine what type of rate you are receiving. Interest rates can be broken down into two broad categories, both of which you should be familiar with before applying for any type of loan: fixed rate loans and adjustable rate loans.

Fixed Rate Loans

A fixed rate loan is a loan that will guarantee an interest rate for the life of the loan. This is a standard rate option available across mortgages, vehicles, personal loans, and many other lending products.

The benefit of fixed rate loans is that your payment—and the interest you pay—will be consistent across your entire repayment term. If you receive a loan when interest rates are low across the lending market, you may also be able to lock in a cheaper rate as compared to the rates that might be available months or years down the road. The security and stability of these loans is the primary reason why consumers opt for fixed rate loans instead of an adjustable rate.

Adjustable Rate Loans

Unlike fixed rate loans, an adjustable rate loan is subject to change over time. In many cases, the rate on a loan will be fixed for a certain period of time before the lender is able to “adjust” that rate based on current market rates.

Most adjustable rate loans offer a low rate at the start of the repayment period, which can incentivize consumers to choose this type of loan over fixed rate alternatives. But this pricing schedule also comes with risk: If rates increase in the future, your adjusted interest rate could soar much higher than the introductory period, and even higher than what fixed rate loans are offering at that time.

In this sense, an adjustable rate loan is a gamble on the future. It could end up saving you money over the long run, but you also accept the risk that this bet will backfire and ultimately cost more than a fixed rate alternative. However, if you plan on paying a loan off early—during the more affordable, fixed rate repayment period—the adjustable nature of the rate may be irrelevant.

• Use the overview above to determine the best type of loan based on your needs. 
• Figure out what information you need to apply. In addition to basic information such as proof of income, proof of address, and bank statements, different loan types may have their own requirements. For student loans, you may require a FAFSA. For business loans, you may need records of transactions and other revenue information.
• Submit applications to multiple lenders. Even if you have a lender you prefer to work with, multiple applications will give you multiple quotes that you can use to secure the most cost-effective loan and the best lending experience.
• Be responsive to lender processing requests. Business and mortgage loans in particular may require you to gather additional information and documentation. The faster you can supply this information, the more likely you will be to have your loan application approved on time.
• Sign paperwork, and receive your funding. Again, this specific process may vary based on the loan and lender. Mortgages involve extensive paperwork and signatures, whereas some personal loans and even auto loans can be quickly finalized to fund your purchase.

About FSCB

Whether they’re seeking a line of credit, a personal loan, credit card transfer options, or financial counseling services to improve your money management, we’re committed to helping our customers set and reach their financial goals.

Since 1954, First State Community Bank has been a leading financial resource for residents and businesses across the state of Missouri. First State Community Bank has built its reputation on an unyielding commitment to delivering the best possible service to customers and partners, from the Junior Savers who open an account with $1 to those applying for multimillion-dollar commercial loans. We are here to help you reach your financial goals today and into the future.