How to Get a Loan, One Step at a Time

Decide whether a loan is the right tool

A loan trades a bigger total cost for money now. That trade can make sense, but only when the thing you're paying for is worth more than the interest. Ask yourself two questions first: will this expense come back next month, and could you cover it another way within a few weeks?

If you need a small amount fast, read the alternatives to payday loans before you apply anywhere. A payment plan with the hospital or the utility is often cheaper than any loan.

Work out what you can afford before a lender does

Lenders decide how much they will lend you. Only you know how much you can repay without falling behind on rent or groceries. Start with the monthly payment you can carry, then see which amount and term produce it. Here is one amount at one rate over three terms:

Stretching from 24 to 48 months cuts the payment by $165.24 but adds $1,377.84 in interest. Pick the shortest term whose payment still leaves room for a surprise bill. Lenders also look at your debt-to-income ratio; Funditia explains how to work out your debt-to-income ratio, and the loan affordability calculator turns a payment into a loan amount.

Gather what lenders will ask for

Having these ready speeds up both prequalification and the formal application, and keeps you from guessing at numbers that a lender will later verify.

• Identity: a government-issued photo ID and your Social Security number.
• Income: recent pay stubs or, if you're self-employed, tax returns and bank statements.
• Housing cost: your monthly rent or mortgage payment.
• Existing debts: balances and monthly payments on cards, auto loans and student loans.
• Bank details: the account where the money should land and, if you want autopay, where payments should come from.
• The purpose and amount: some lenders price debt consolidation differently from other uses, and some pay creditors directly.

Shop with soft checks, then apply once

1. 1 Check your credit reports first. Errors can cost you a higher rate, and fixing them takes time. Do this a few weeks before you need the money.
2. 2 Prequalify with three or more lenders. Many show an estimated rate after a soft inquiry, which doesn't affect your score. Ask each lender which kind of check it uses. Our guide to prequalification covers what those estimates do and don't promise.
3. 3 Check the lender is licensed in your state. NMLS Consumer Access lists most state-licensed lenders; your state's lending rules say what they may charge.
4. 4 Choose one offer and apply formally. This is usually when a hard inquiry happens. Funditia explains how hard and soft inquiries affect a score.
5. 5 Answer verification requests quickly. The lender may ask for pay stubs or a bank statement before it makes a final decision.

Read the four numbers in the disclosure box

The Truth in Lending Act, through the CFPB's Regulation Z, requires the lender to give you its cost disclosures before the loan is final. They must be grouped together, apart from everything else, and the APR and finance charge must stand out more than any other term. For the 36-month loan above, the box would read:

The finance charge plus the amount financed equals the total of payments. If a fee is taken out of the loan, the amount financed drops and the APR rises above the interest rate. The disclosure must also say whether there's a prepayment penalty, what a late payment costs and whether the lender takes collateral. To weigh several offers against each other, use our guide to comparing loan offers.

If you're turned down or offered worse terms

A denial comes with rights. Under the Equal Credit Opportunity Act and Regulation B, a lender must notify you of its decision within 30 days of receiving a completed application. A denial notice must be in writing and either give the specific main reasons or tell you that you can ask for them within 60 days. "You didn't meet our internal standards" doesn't count as a reason.

When the decision relied on a credit report, the Fair Credit Reporting Act adds more. The notice must name the credit bureau that supplied the report, say that the bureau didn't make the decision, include the credit score used, and tell you that you can get a free copy of your report if you ask within 60 days and dispute anything wrong. If you were approved but at a higher rate because of your report, you may get a risk-based pricing notice with similar information instead.

• Read the reasons. A high debt-to-income ratio calls for a smaller loan or a payoff first; a thin file may call for a cosigner or a secured loan.
• Pull the free report and fix any errors before you apply again.
• Don't fire off applications to every lender you can find. Each formal application can add a hard inquiry.
• See what's realistic at your score in loans by credit score.

Common questions