Investing in the future is expensive. Be it an education, a home or a car, sometimes a loan is the only option to get a hold of a big-ticket item. As a young person, it can seem almost impossible to get approved for a loan without parental support. That\'s why understanding the ins and outs of the loan process can be essential to getting that check from the bank on your own. (To read more articles devoted to young adults, see Portfolio Management For The Under-30 Crowd, Competing Priorities: Too Many Choices, Too Few Dollars and Retirement Savings Tips For 18- To 24-Year-Olds.)

The Loan Process
When thinking about getting a loan, it can be important to look at the situation from the bank\'s perspective. To the bank, loans are a major source of revenue. The bank cuts you a check for a certain amount of money (principal), and you give the bank that same amount of money back as well as the interest that is charged for the privilege of letting you have that money. Interest payments are the lifeblood of most banks. (For more on this topic, see Analyzing A Bank\'s Financial Statements.)

Loans aren\'t hand-outs, and they shouldn\'t be approached as such; a bank\'s primary concern is determining whether or not you will be able to pay back your debt based on its time frame and agenda.

Banks judge potential borrowers based on a number of key things. Among them:

  1. Who: Who are you? What do you have to offer the bank?
  2. What: What\'s the money for? A bank is a lot more likely to lend money to someone who wants to build a home addition (and add equity) than someone who is planning on spending the money on consumption or disposable goods.
  3. Where: Where you\'re trying to get your loan from can be a big factor of whether or not you get it. Lending criteria can vary between a brick-and-mortar bank and an online financial institution as well as between various geographic regions - some lenders are going to be more prone to give than others.
  4. When: The length and terms of the loan - both the interest rate and the duration of the loan - determine when banks can start recording a profit and also how much profit it will reap.
  5. How: Can the bank be sure that you will be able to pay the loan off based on the terms? How can you guarantee payback or at least hedge the bank\'s risk in some way?

Who You Are
Who you are is actually an important element of whether the bank will see you as a viable borrower. Believe it or not, you\'re being judged from the moment you walk in that door based on one of the few tools the lender has - your appearance. So dress the part: If you want to be treated like a professional, dress like one.

Right or wrong, the lender will use their biases and preconceptions in determining whether you\'re a good risk for the institution to take on. Also, don\'t be surprised if the bank does a background check on you. They will certainly be checking into your credit history. (To read more about credit, see The Importance of Your Credit Rating and Credit, Debit And Charge: Sizing Up The Cards In Your Wallet.)

What You Plan to Do
Since it\'s the bank\'s money, it\'s also the bank\'s business as to what you\'re planning on doing with it. If you need a bank loan to fund your gambling habit, chances are you won\'t be getting much in the way of financing.

If, however, you\'re trying to purchase or improve an asset - like a car, a home or your business - banks usually see this as a point in your favor.

Where You Plan to Borrow
These days, there are alternatives to getting a loan from a traditional bank. Online lending is quickly becoming a popular option because of higher online competition and quicker loan approval. With online lenders, fraud-awareness and reputability become major concerns. Always make sure that you\'re only dealing with reputable companies and not readily giving away private information to non-secure or irresponsible companies. (To make sure you avoid online scams, see Online Investment Scams Tutorial and 10 Things To Consider Before Selecting An Online Broker.)

Where you are in the world can also have an impact on loan approval. This is a matter of scarcity. If you\'re trying to get a loan in an economically depressed area, banks are bound to be much more selective about who they loan money to than in an area of vast economic growth. By taking this into consideration, you can get a much more realistic view of your prospects.

When You Pay
When it comes down to deciding which loan to accept (or in the case of the bank, what to offer), the terms of the loan are the biggest factors. Some of the items that can vary are the interest rate, the length of the loan and the type of loan.

Interest is the premium that you\'re paying to the bank for the use of their money, so lower interest rates are better for borrowers. The duration is the amount of time you\'ll be paying off the loan, so once again, a smaller number is better - this will mean a lower overall interest expense.

The type of loan you\'re looking at is also significant because it can be a big factor in the amount of money you pay during each payment period.

How They Decide
The bank isn\'t going to give you a cent if you don\'t have the means to pay it back later (or if you don\'t have enough assets for the bank to get their money back). That\'s why they look at a few key things about your financials:

  1. Collateral - What major assets do you have that the bank can seize if you default on your loan? Typical collateral includes your home or your car. This will also take into consideration what you are using the borrowed funds for, such as a house, which would be collateral to the loan.
  2. Credit - Your credit absolutely comes into play when you apply for a loan. If you have bad credit, getting a loan is going to be difficult unless you are willing to accept less attractive loan terms (like higher interest rates and lowered limits).
  3. Income - Your lender is going to want to make sure that you can afford to make payments on your loan. Higher income translates to lenders being more comfortable with letting you borrow money. (For more information, see Invest In Yourself With A College Education.)

If you don\'t seem like a picture perfect loan candidate, getting stuck with higher interest rates and fewer loan alternatives is more than likely. And if you have few assets, bad credit and/or are barely scraping by, chances are that lenders won\'t be calling you back.

Make Yourself Attractive to Lenders
The best way to make lenders fight over you is to make sure that you address each of the five things in a positive way.

  1. Who: Dress the part when you go to apply for your loan and make sure that you don\'t have any skeletons in your closet that lenders won\'t be happy to see.
  2. What: Lenders don\'t just give money away. Make sure that your need is legitimate and financially justifiable.
  3. Where: Look into online lenders you\'re interested in to make sure that they\'re reputable and try to avoid looking for financing in areas where bank money is scarce.
  4. When: Only go for loan terms that you can live with, and understand what you\'re going to end up paying out over the life of the loan.
  5. How: Think about what assets you have that can be used as collateral, build up good credit before you go to a lender, and make sure that you have a viable plan for loan repayment.

Let\'s face it, the reason that young people typically need a co-signer for a loan is because a co-signer typically has the five things banks are looking for. When you know what lenders look for, as well as what you can do to make sure that you look like a responsible borrower, it\'s quite possible to get a loan without your parents\' signature and without sky-high interest rates.

Related Articles
  1. Personal Finance

    Top Universities for Getting an MBA Abroad

    Going abroad for an MBA can add cachet when it comes time to get a job.
  2. Credit & Loans

    10 Ways Student Debt Can Destroy Your Life

    If you're getting a student loan, think critically about how you will manage your loan. Student debt could have a profound negative impact on your life.
  3. Budgeting

    Top 10 Ways College Students Can Save Money

    College costs are soaring, but fortunately, there are several ways for college students to save money - and some are quite painless.
  4. Personal Finance

    8 Ways to Find Cheap Textbooks

    Textbooks are so expensive. What are the tricks to find cheaper books?
  5. Budgeting

    Best 5 Money-Saving Tips to Get out of Debt

    Understand the different types of debt and the reasons why people get into debt. Learn about five tips to follow to get out of debt.
  6. Credit & Loans

    Why Ignoring Your 529 Plan Could Cost You Big

    Saving for your kids' college tuition can be difficult. Here's how a 529 plan can help and how you, too, can help your 529 plan.
  7. Professionals

    The Pitfalls of PLUS College Loans

    Here's how parents can avoid the pitfalls of PLUS Loans when it comes to funding their children's college education.
  8. Professionals

    Getting a College Student to Love ... Investing?

    College students have a big advantage over many other investors: time. Here's how to get them interested in investing.
  9. Budgeting

    How to Use an Allowance to Teach Your Kids About Money

    On the fence about whether or not you should give your kids an allowance? An allowance is the perfect way to introduce your kids to financial lessons.
  10. Credit & Loans

    Mortgage Broker vs. Direct Lenders: Which is Best?

    There are key differences between mortgage brokers and direct lenders. Here's how to choose which is best for you.
  1. Student loans, federal and private: what's the difference?

    The cost of a college education now rivals many home prices, making student loans a huge debt that many young people face ... Read Full Answer >>
  2. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  3. When capitalizing interest, will interest accrue while you are in a deferment?

    When capitalizing interest, interest accrues while a person is in a deferment of his loan. In the event of a deferment, the ... Read Full Answer >>
  4. Why is more interest paid over the life of a loan when it is capitalized?

    More interest is paid over the life of a loan when that interest is capitalized because the capitalized interest is added ... Read Full Answer >>
  5. What are some examples of simple interest loans?

    Two good examples of simple interest loans are simple interest car loans and the interest owed on lines of credit such as ... Read Full Answer >>
  6. How can I use the correlation coefficient to predict returns in the stock market?

    Simple interest is most commonly seen in short-term loans, such as those from payday lenders or pawn shops. You might see ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!