Key takeaways
- Prequalifying for a loan is a preliminary step that allows borrowers to assess their likelihood of approval and potential loan terms without impacting their credit score.
- Prequalification helps borrowers shop around for the best loan offers. It allows them to compare rates, terms, and eligibility criteria from multiple lenders.
- Being prequalified does not guarantee approval, but it’s a good first step. Provide accurate detailed information for best results.
Before you apply for a personal loan, see if you prequalify. Many lenders make it easy for you to check online. Prequalifying lets you compare offers from multiple lenders, see your estimated interest rate, and give you an idea of your terms all without any commitment or damage to your credit score. It’s a great way to explore personal loan offers and see what you can get.
Being prequalified doesn’t guarantee you’ll be approved for the loan. You have to formally apply and most likely undergo a hard credit check. Still, it’s a good first step to take when you’re in the market for a personal loan.
Here’s how you can prequalify, tips to boost your approval odds, and what to do if your credit score is on the low end.
Why Prequalifying for a Personal Loan is Important
Prequalifying for a personal loan is akin to laying the groundwork before building a house. It gives you a clearer picture of what loan terms you might receive, such as the interest rate and loan amount. It lets you compare potential APRs across multiple lenders so that you can find the best terms, and lowest interest rate, and save money all without affecting your credit score.
5 Steps to Prequalify for a Personal Loan
1. Fill out the Prequalification Form
Start by filling out a prequalification form with a lender. Before you fill out the form, consider how much you need to borrow and make sure the monthly payments will fit into your budget. The lender will most likely want to know:
The desired amount and reason for the loan.
Annual income and details about your employment.
Contact information like your phone number and address.
Personal details including your date of birth and Social Security Number.
If you have other assets like savings or retirement accounts.
2. Undergo a Soft Credit Check
Lenders will conduct a soft credit check to determine your creditworthiness. This is a basic review of your credit history that doesn’t affect your credit score and won’t show up on your credit report, unlike a hard credit pull.
3. Find Out If You Prequalify
After the soft credit check, the lender will inform you if you prequalify for a loan. You usually find out in a matter of minutes.
This is not a guarantee of approval, but a signal that you meet the basic criteria. You will typically see the amount you prequalify for, a potential APR, the total interest cost, and an estimate of your monthly payments.
The lender can always change the offer when you formally apply. To reduce the chances of that happening, give as much detailed information as possible on your prequalification form.
4. Compare Loan Offers
If you prequalify, you’ll receive tentative offers. It’s crucial to compare these offers based on interest rates, monthly payments, repayment terms, additional fees, and other loan features. Look and see if any offers have perks like flexible payment dates, hardship assistance, or no prepayment penalties.
Do your analysis and find the one that works best for you. Make sure you’re comfortable with the estimated monthly payments before you proceed.
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5. Apply for the Best Loan Offers
Once you’ve compared offers, apply for the best one that suits your needs.
This step will involve a hard credit check – which can cause your credit score to dip – and additional documentation. You’ll likely have to provide bank statements, pay stubs, and recent tax returns. The lender will use all this documentation to verify the information you submitted during prequalification.
If approved, you could receive your money in as little as one business day. Other lenders take up to a week to send the funds.
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What to Do If You’re Not Approved
If you don’t prequalify, don’t despair. The lender should send you an adverse action notice or letter that will explain why you were denied, state your credit score, and how to get a free copy of your credit report.
Review the letter and start addressing your problem areas. You may need to improve your credit score, pay down debt, or increase your income. It could be as easy as staying at your job for a few more months to show stability.
Tips to Boost Your Prequalification Odds
Improve Your Credit Score: Pay bills on time, reduce debt, keep your credit utilization below 30%, and correct any errors on your credit report.
Lower Your Debt-to-Income Ratio: This ratio is crucial in lending decisions as it helps gauge your ability to afford new debt. Most lenders want a ratio of 35% or less. Pay down existing debts as much as possible.
Increase Your Income: More income can improve your loan eligibility.
Consider a Co-Signer: A co-signer with good credit can significantly increase your chances of being approved, and you can usually get lower rates too. Note that your co-signer will now be on the hook for any missed payments.
Research Lenders: Find lenders for your credit profile. There are plenty of online lenders and credit unions who specialize in loans for bad credit. Don’t bother to apply if your score is below the lender’s minimum.
Secured Personal Loan: If you’re unable to prequalify for an unsecured personal loan, try for a secured one since they’re easier to get approved for. You will have to put up collateral like your car or savings account to guarantee the loan and you may lose it if you fail to make payments.
Use a loan marketplace: Online loan marketplaces make it easy to prequalify for multiple offers at once with lenders who match your financial profile. Take advantage of them and save yourself time.
What to Know About Prequalifying with Bad Credit
Even with bad credit, prequalifying for a personal loan is possible.
Look for lenders who specialize in bad credit loans. Credit Unions tend to offer flexible terms for members with low credit scores. Some online lenders will consider other parts of your financial life like your education, employment, and housing situation, not just your credit score.
Be prepared to pay higher interest rates if your score is on the low end.
Need to lower your debt-to-income ratio?
Pre-qualification vs. Preapproval
Pre-qualification and preapproval are two different stages in the loan process, each with distinct purposes and impacts on your credit.
Pre-qualification is the initial step where a lender evaluates your financial information, such as income and debt, to give you an estimate of the loan amount and terms you might qualify for. This process involves a soft credit check, which does not affect your credit score. Pre-qualification provides a general idea of your borrowing capacity and helps you compare different loan offers without any commitment.
Preapproval, on the other hand, is a more detailed evaluation. It requires a formal application and a hard credit inquiry, which can temporarily lower your credit score. During preapproval, the lender thoroughly reviews your credit history, income, employment, and other financial details to provide a specific loan amount and terms. A preapproval indicates that the lender is willing to offer you the loan, pending final verification of your information.
Understanding the difference between pre-qualification and preapproval is crucial. Pre-qualification is useful for initial research and comparison, while preapproval is a stronger indication of your loan eligibility and often required when making significant financial commitments, like buying a home.
Pros and Cons of Prequalifying for a Personal Loan
Pros of Prequalifying for a Personal Loan:
- No Impact on Credit Score: Prequalifying involves a soft credit check, which doesn’t affect your credit score, allowing you to explore loan options without any negative consequences.
- Better Financial Planning: It provides an estimate of loan terms, including potential interest rates and loan amounts, helping you plan your finances more effectively.
- Identifies Red Flags: Prequalification can highlight any issues on your credit report that may affect your loan application, giving you a chance to address them before formally applying.
- Comparison Shopping: You can compare offers from multiple lenders to find the best terms without committing to any one lender.
- Increased Confidence: Knowing you prequalify can boost your confidence and streamline the process when you move forward with a formal loan application.
Cons of Prequalifying for a Personal Loan:
- Not a Guarantee: Prequalification is not a guarantee of loan approval. Final approval requires a hard credit check and more detailed verification of your financial information.
- Limited Accuracy: The terms and amounts provided during prequalification are estimates and may change upon final approval.
- Potential for Overestimation: Some lenders may provide optimistic estimates that don’t align with what you ultimately qualify for, leading to potential disappointment.
- Incomplete Information: Prequalification doesn’t provide a comprehensive picture of all the fees and conditions associated with the loan, which may only become clear during the formal application process.
- Multiple Inquiries: While soft inquiries don’t affect your credit score, prequalifying with multiple lenders might create confusion in comparing terms and offers.
Frequently Asked Questions
Final Thoughts
Prequalifying for a personal loan is an excellent first step in the borrowing process. It provides insight into the loan terms you might expect, helping you plan your finances more effectively. This preliminary step allows you to gauge potential interest rates and repayment periods without impacting your credit score, as prequalification typically involves a soft credit inquiry. This is crucial for maintaining a healthy credit score, especially if you are considering multiple lenders.
Additionally, prequalifying can give you a clearer understanding of your borrowing power and help you identify any potential red flags on your credit report that might affect your loan application. By addressing these issues early, you can improve your chances of securing favorable loan terms. Even with less-than-perfect credit, many lenders offer prequalification, allowing you to explore your options without committing to a particular lender right away.
To navigate the prequalification process confidently, start by researching various lenders and their specific requirements. Gather all necessary documentation, such as proof of income and employment history, to streamline the process. By comparing different prequalification offers, you can identify the best loan terms for your financial situation. Taking these steps ensures you are well-prepared and informed, ultimately leading to a better borrowing experience and a loan that fits your needs.
