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Are you coming up short in cash to cover a large expense? If so, a loan can help.

Loans are available to Canadians who may not have the liquid cash needed to pay for an expensive item upfront. In these cases, loans can make large purchases possible.

Consumers typically look to their bank when it comes time to apply for a loan. Banks often offer lower rates and better terms, but their loan requirements are usually pretty stringent. That’s why it’s important to understand what the loan application process involves and what you can do to strengthen your application.

Types Of Loans You Can Get From The Bank

Banks offer a variety of types of loans to suit different needs, including the following:

Personal Loans 

A personal loan is a type of installment loan in which the lender provides the borrower with a lump sum of cash. The borrower must then repay the loan amount plus interest in regular installments over the life (or term) of the loan. 

The money from a personal loan can be used for just about anything, including home renovations, debt consolidation, and other large expenses. Term lengths usually range from 6 months to 5 years. 

Car & Vehicle Loans

A car loan is secured against a car (or another type of vehicle) that you plan to buy. The lender offers enough funds to cover the cost of the vehicle. In turn, the borrower will need to pay back the loan plus interest over a set period of time through regular installments. 

The vehicle collateralizes the loan, which means if you default on the loan payments, the lender may repossess the vehicle to recoup any losses. If you think you’re going to fall behind on your car loan payments, get in contact with your bank right away and before it happens. This way the bank can work with you to create a plan that works for both parties.

Mortgages

A mortgage is another type of loan that requires the borrower to repay the lender in regular installment payments until the loan amount is fully repaid. Borrowers take out a mortgage to help finance a home purchase. The home serves as collateral for the loan.

Mortgages typically involve an extensive application process in which the lender will verify your ability to keep up with mortgage payments throughout the entire amortization period, which can range from 10 to 25 years or longer.

Business Loans

A business loan is meant to provide entrepreneurs with the funding needed to start or grow their businesses. Like other installment loans, it requires that borrowers make regular payments toward paying off the full loan amount over a specific term, plus interest. For this type of loan, a business owner’s personal and business finances will likely be taken into account during the application process.

Line Of Credit

A line of credit differs from installment loans and works more like a credit card. With a line of credit, the borrower is provided with a credit limit within which they can borrow against. You are then free to borrow as much or as little against the credit limit as you want, as long as you don’t go over the limit. 

Like a credit card, you’re only charged interest on the withdrawn amount with no deadline to repay the funds. Once the funds are repaid, you can borrow over and over as the need for extra money arises. 

Process Of Getting A Loan From the Bank

The process for applying for a loan depends on the type of loan you are looking for. For instance, the mortgage application process is usually much more involved than a car loan application. That said, there are a few steps to take regardless of the loan you intend to apply for. 

Credit Check

Banks typically check your credit score to assess your risk level before they extend a loan. A higher score is indicative of someone being more likely to make their payments on time, while a lower score presents a higher risk for the lender. 

Consider Checking Your Own Credit

Before you apply for a loan, consider pulling your own credit report to see what your score is, and to make sure there are no mistakes on your report. If you find any errors, have them investigated and fixed right away. Keep in mind that the credit score you see when you check your own credit will likely be different than the score the lender sees.

If your score is a little on the low end, take some steps to boost it before applying for a loan, such as making all bill payments on time, spending less than 30% of your credit card limit, and refraining from applying for too many loans or credit accounts within a short period of time. 

Organize Your Paperwork

Again, the type of loan will determine the type of paperwork you’ll need to gather. Make sure you find out what type of paperwork you’ll need to provide to your lender and gather it all so it’s all ready for the application process. 

The following loan types require their own documentation:

Car loans: 

  • Vehicle information
  • Trade-in documentation (if you’re trading in an existing vehicle)
  • Proof of income
  • Proof of insurance
  • Bank information

Mortgages:

  • Purchase agreement
  • Paystubs
  • Proof of employment
  • Tax forms
  • Bank account information
  • List of assets and liabilities

Business loans:

  • Income statement
  • Balance sheet
  • Current cash flow
  • Cash flow projections
  • Bank statements
  • Tax returns

Get Pre-Approved By The Bank

While not required, getting pre-approved for a loan is a recommended step before applying for a loan. Pre-approval will tell you how much you’ll be able to borrow successfully and will allow you to lock in an interest rate. It will also help move the application process along, as the initial steps to verifying your financial strength will have already started. 

If you’re planning to buy a home, a pre-approval letter will also show sellers that you’re a serious and qualified buyer, which will be very useful if the competition is particularly strong. 

Apply

Once you’ve taken the above steps, you can officially apply for a loan. If approved, you’ll need to review and sign the loan agreement. Once the application process is finalized and approved, you’ll receive the specified funds shortly afterward, and your installment payment plan will start.

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What Happens If Your Bank Loan Application Gets Rejected? 

If you get turned down for a loan, find out why. There could be a number of reasons why the lender rejected your loan application, including the following:

Low Credit Score

If you don’t meet the minimum requirements when it comes to your credit score, your lender may view you as a risky borrower and may turn you down for a loan as a result. 

High Debt-To-Income Ratio

Perhaps your current debt load is too high compared to your income. In this case, your lender may worry that you won’t have enough left over after paying all your existing bills to contribute to a new loan payment. 

High Loan-To-Value Ratio

If you’re applying for a mortgage, for example, and your down payment is too low relative to the cost of the home, you may be turned down for a mortgage. A high loan-to-value ratio — which is a measure of the loan amount compared to the appraised value of the home — can make it more difficult for you to get approved for a mortgage because you’ll have less equity in the home, leaving the lender with more risk. 

Unstable Employment

Whether your job is unstable or your income is insufficient, your employment situation may not be strong enough to get you approved for a loan. 

How To Improve Your Chances Of Approval From The Bank?

If the bank rejects your loan application, there are some potential solutions to consider:

Get A Co-Signer

Adding another person to the loan who has a strong financial profile and good credit score can help strengthen your loan application.

Offer An Asset

Collateralizing the loan with an asset of value may reduce the lender’s risk, which can help improve your odds of loan approval. 

Request A Lower Loan Amount

As mentioned above, a high loan-to-value ratio can weaken your loan application. But if you request a lower loan amount, your lender may be more comfortable extending the funds. 

Apply With An Alternative Lender

Traditional lenders like banks and credit unions usually have strict lending criteria. If you’re unable to get approved with a conventional lender, consider applying with an alternative online lender. Just keep in mind that although it may be easier to get approved with these types of lenders, you may be stuck with a higher interest rate.

Bank Loan FAQs

Do banks require a credit check? 

Yes, banks typically conduct a credit check on applicants before deciding whether or not to approve a loan application. This gives lenders the chance to make sure you’re financially capable of making your loan payments on time.

Will a bank loan affect my credit?

Applying for a bank loan may affect your credit temporarily. That’s because banks typically conduct a credit check, otherwise known as a “hard pull” or “hard inquiry.” This may pull down your score for a short time, but it should bounce back up, especially if you’re diligent with your loan payments.  

How long does it take to get a bank loan?

The time it takes to get approved for a loan and receive the funds depends on a few factors, such as the loan type, the amount requested, your financial situation, and the lender. For instance, it might take a couple of days to get a car loan or personal loan, but it may take a few weeks for a mortgage.

How much can I qualify for with a bank?

The loan amount you may be able to apply for depends on the loan type, your credit score, your debt load, and any collateral that you put forth. The better your financial and credit profile are and the more valuable the collateral is, the more you may be able to qualify for. 

Final Thoughts

Before applying for a loan, take some time to make sure your profile is strong, including your finances and credit score. Further, make sure to find out exactly what is needed to apply for a loan and get all your documents in order so you’re fully prepared to apply for a loan. And if the bank turns you down, some alternative lenders may be willing to help you out. 

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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