4 Steps to Prequalify for Personal Loans: What You Should Know Before You Apply

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Updated: October 10, 2024

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Whether you’re financing a major purchase or covering an unexpected expense, a personal loan is a versatile financial tool worth considering. However, with so many lenders having different rates, terms and eligibility requirements, finding the best option for your needs can be challenging. Prequalifying for a personal loan can help you navigate this process by providing a snapshot of the loan terms you may qualify for, all based on a soft credit check that doesn't impact your credit score.

While not all lenders offer the option to prequalify, many banks, credit unions and online lenders do. By learning how to prequalify for a personal loan, you can streamline the application process, save time and potentially secure better terms from competitive lenders.

Key Takeaways

Prequalifying for a personal loan won’t negatively affect your credit score since it only requires a soft credit pull.

Prequalifying for a personal loan involves submitting information like your personal details, contact information, employment history and other financial obligations.

If you can’t get prequalified for a personal loan, it may be due to factors like a low credit score, high debt-to-income ratio or insufficient income.

What Is Personal Loan Prequalification?

Prequalification for a personal loan is an initial evaluation by lenders to determine your eligibility for a loan. During this process, lenders assess factors like your income, debts and credit score through a soft credit check, which does not affect your credit score.

When you prequalify for a personal loan, you get an idea of the loan amounts, interest rates and terms you might receive. It also enables you to compare options from different lenders and helps you find a loan that fits your needs before you commit to a formal application.

Difference Between Prequalification vs. Pre-approval

Loan prequalification and loan pre-approval are distinct terms in the lending process. Prequalification is an initial evaluation of your financial status based on self-reported information. It typically involves a soft credit check that does not affect your credit score, giving you a general idea of the loan amount and terms you might qualify for.

Pre-approval is a more detailed and formal step. It requires a hard credit pull, which can slightly impact your credit score, and a thorough review of your financial details. Pre-approval often comes closer to a conditional commitment from the lender based on the accuracy and validity of the provided documents.

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TIMING YOUR LOAN PREQUALIFICATION

When it comes to personal finance, timing can be important. The best time to apply for prequalification is typically before a major purchase or life event. Here’s why:

  1. Before a major purchase: If you’re planning a significant purchase like a car, home renovations, or expensive medical procedures, prequalifying for a loan can give you a clear idea of how much you can borrow and what interest rates you might qualify for. It also helps you budget and negotiate service providers.
  2. Before a life event: Life events such as weddings, moving to a new city, or expanding your family can come with substantial costs. Prequalifying for a loan ahead of these events can help you understand what you can afford and plan your expenses better.
  3. When interest rates are low: If you’re not in a rush, it can be worth waiting for a period when interest rates are low. Prequalifying during such times could lock you in a lower interest rate which lowers the overall cost of your loan.
  4. When your credit score improves: If you’ve been working on improving your credit score, it could be better financially to wait until your score has increased before applying for prequalification. That’s because a higher credit score typically qualifies you for better loan terms. — Alvin Yam, CFP

4 Steps to Prequalify for a Personal Loan

Knowing the steps involved in prequalification will make the process smooth and efficient, enhancing your ability to find favorable borrowing terms that suit your financial needs.

Step 1: Examine Your Financial Readiness

Assessing your current financial situation helps you understand what you can realistically afford and what loan terms might be most favorable. Approaching lenders with accurate information increases your chances of receiving a prequalification offer that matches your expectations.

Consider the following factors:

  • Income and debts: Review your total income against your existing debts to determine your debt-to-income ratio. This ratio is a key indicator that lenders use to evaluate your ability to manage and repay new debt.

  • Credit score: Check your credit score as it greatly influences the interest rates you might receive. A higher credit score can lead to better loan terms, including lower interest rates and more flexible repayment options.

  • Financial readiness for a new loan: Assess your monthly budget to see if you can handle additional loan payments. Ensure that taking on a new loan does not strain your finances or hinder your ability to meet other financial obligations.

  • Financial goals: Align potential loans with your long-term financial goals. Whether it's consolidating debt, financing a major purchase or covering an unexpected expense, ensure the loan supports your overall financial objectives without jeopardizing other plans.

By carefully evaluating these aspects, you can approach the loan prequalification process knowing your financial readiness.

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CAN YOU PREQUALIFY FOR A PERSONAL LOAN WITH BAD CREDIT?

With bad credit, prequalifying for a personal loan can be challenging, but it’s possible. You may have to seek lenders specializing in bad credit loans — they’re more likely to understand your situation and offer suitable options. Be prepared for potentially higher interest rates because of the increased risk associated with bad credit. Improving your credit score can help. Also, consider having a co-signer with a strong credit history — it might boost your chances to prequalify.

Step 2: Research Lenders

Not all lenders offer the option to prequalify for their personal loans. Make sure to take the time to carefully review each lender, considering the following factors:

  • Lender requirements and loan products: Check the specific requirements needed to qualify for a loan, such as minimum income or credit score and the types of loans available.

  • Customer reviews and lender reputation: Read customer reviews and research the lender's reputation in the market. Positive feedback and a strong reputation often indicate reliable service and customer satisfaction.

  • Fees and additional costs: Look into all personal loan fees, such as origination fees, late payment penalties and prepayment fees.

  • Lender flexibility and customer service: Assess the lender’s flexibility in terms of payment plans and their responsiveness to customer inquiries. Effective customer service helps in managing your loan effectively, especially if unforeseen financial challenges arise.

Step 3: Complete the Prequalification Form

Filling out a prequalification form will typically be completed on a lender’s website.

Here’s the information you'll usually need to submit:

  • Loan details: Specify the amount you want to borrow and the purpose of the loan. This helps the lender understand your financing needs and how they fit into their loan offerings.

  • Personal information: Include your full name, date of birth and Social Security number. This information is used to verify your identity and initiate a credit check.

  • Contact information: Provide your current address, phone number and email address. Lenders will use this information to contact you about your application.

  • Employment information: Detail your current employer, job title and income. This shows lenders your employment stability and ability to repay the loan.

  • Other financial information: You might need to provide details about your other financial obligations, like existing debts.

Step 4: Compare Prequalification Offers

After prequalifying, you'll receive various offers from different lenders. Review each offer paying close attention to interest rates, fees and the specific terms of the loan. Consider the total cost of the loan over its lifespan to understand the full financial impact.

When comparing offers, consider also factors such as the lender's willingness to adjust payment schedules and the availability of benefits like exceptional customer service and hardship assistance. These can greatly influence your satisfaction and financial stability throughout the loan period.

Keep in mind that these offers can be used as leverage to negotiate better terms with potential lenders. By presenting competing offers, you may be able to secure more favorable terms from a lender who fits your preferences.

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WHAT HAPPENS AFTER PREQUALIFICATION?

After prequalifying for a personal loan, the next step is submitting a formal application. This process involves a hard credit inquiry. You must also provide detailed information about your finances, including your job, income and any existing debts to help the lender decide if they will approve your loan.

The time it takes to get a response can vary, usually from a few days to about a week. Be ready to answer any additional questions the lender might have. Quick and clear responses help speed up the process.

Benefits of Prequalifying for a Personal Loan

While optional, prequalifying for a personal loan provides you with valuable insight and helps you make informed financial decisions as you shop. Here are several reasons why prequalifying is a smart move:

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    Preview of loan options

    Prequalifying gives you a clear view of the loan amounts, interest rates and repayment terms lenders are willing to offer, allowing you to explore your options without commitment.

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    No impact on credit score

    Because it typically involves only a soft credit check, prequalifying does not affect your credit score, protecting your credit health as you shop around.

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    Time savings

    Having insight into which loans you may qualify for simplifies and speeds up the process of finding the right lender, saving you valuable time.

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    Negotiation leverage

    With prequalification offers in hand, you can effectively negotiate with lenders, potentially securing more favorable loan terms based on competing offers.

These benefits make prequalifying a worthwhile preliminary step in the personal loan buying process, offering both insight and flexibility.

What to Do if You Can’t Get Prequalified for a Personal Loan

If you can't get prequalified for a personal loan, it may be due to factors like a low credit score or insufficient income. Here are steps you can take to improve your chances in the future:

1
Find out why you weren't prequalified

Understand the specific reasons you were not prequalified. Was it due to a low credit score, high debt-to-income ratio or insufficient income? You can take corrective actions that address the most manageable reasons first.

2
Improve your credit score and financial stability

Work on improving your credit score by paying bills on time, reducing debt and correcting any errors on your credit report. Strengthening your financial stability also involves increasing your income or reducing unnecessary expenses to improve your debt-to-income ratio.

3
Explore alternative options

Consider other lending sources such as peer-to-peer loans or financial institutions that cater to borrowers with lower credit scores. Sometimes these options offer more flexibility and a higher chance of prequalification.

4
Prepare to re-apply

Once you have made improvements to your financial situation, gather all necessary documents and review your financial strategy before reapplying. Ensure you meet the lender’s criteria to enhance your chances of success on your next attempt.

Tips to Successfully Prequalify for a Personal Loan

To increase your chances of prequalifying for a personal loan, you need to be proactive about your financial health and understand general lending criteria. Here are some strategies to consider:

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    Regularly monitor your credit report

    Keep an eye on your credit report to spot any inaccuracies or outdated information. Regular monitoring also helps you understand how your financial behaviors affect your credit score, allowing you to make adjustments where necessary.

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    Establish a steady source of income

    Demonstrating a reliable income stream reassures lenders of your ability to repay the loan. Consistent employment or other income sources significantly enhance the strength of your loan application.

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    Consider secured personal loans

    Opting for a secured loan, where you offer collateral, can increase your chances of approval. Lenders are more likely to offer loans with favorable terms when there is less risk involved.

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    Add a co-signer to your application

    Including a co-signer with a strong credit history and stable income can improve your loan application. A co-signer provides additional assurance to lenders that the loan will be repaid.

FAQ: Prequalifying for a Personal Loan

We answered some frequently asked questions to provide more insight about the prequalification process.

What does it mean to prequalify for a personal loan?
Does prequalifying for a loan affect my credit score?
What information do I need to provide to prequalify for a personal loan?
Can I prequalify for a personal loan with bad credit?
How long does it take to get prequalified for a personal loan?
Is a prequalification binding?
Can I prequalify with multiple lenders?
What happens after I prequalify for a personal loan?

About Zachary Romeo, CBCA


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Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.

Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.


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