Steps to prequalify for a personal loan
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Prequalifying for a personal loan is a great way to get personalized loan information without making a formal application. It is possible to prequalify without hurting your credit score, and can help you understand your loan options and terms. Prequalification involves researching lenders and providing them with information about your income and employment.
You can increase your chances of being prequalified by paying your bills on time and aiming to pay credit card balances in full each month — or at least keep balances low.
What is personal loan prequalification?
Personal loan prequalification is when you provide a lender with personal details about your credit history, income and assets to see if you are approved for a loan without filling out a full application. If you are preapproved, the lender will provide you with the details of your loan offer, such as the loan amount, interest rate, loan fees and other conditions.
Prequalifying for a loan implies that a lender believes you would make a good candidate to formally apply for the loan. In some cases, you can even prequalify with bad credit — though the loan might come with a higher interest rate. You can check your eligibility with a soft credit inquiry, which will not affect your overall credit score. The amount of loan you are offered will depend on your eligibility as a borrower, such as your income.
What information do I need to prequalify for a personal loan?
Before prequalifying for a personal loan, you should gather some financial information, check your credit score, calculate your debt-to-income ratio and research lenders that are compatible with your credit level.
Here is some information you should have on hand for prequalifying:
- Your Social Security number.
- Income information, including pay stubs, W-2 statements and tax returns.
- Your contact information.
- Your current employer’s name and contact information.
Steps to prequalify for a personal loan
These are the steps to take when you are prequalifying for a personal loan:
1. Check your credit score
Check your credit score before applying to determine which lenders are likely to consider you. Applicants with credit scores of 740 or higher are more likely to get the best rates and terms, but those with good or bad credit standings still have plenty of options to prequalify. However, if you are declined, the lender must send an adverse action letter explaining why you were turned down. If it is due to your credit score, there are multiple ways to improve your score over time.
2. Determine your budget
In addition to your credit score, lenders will consider your income, available credit and current debt obligations to determine how much they should lend you. To help determine your budget, you can calculate your monthly payments and compare that number to your monthly income. This is known as the debt-to-income ratio.
3. Research lenders
Prequalification involves researching lenders for your credit band. You can either go directly to the website of a lender and go through the prequalification process quickly, or use a loan marketplace. By doing this extra legwork, you’ll know which lenders are most likely to approve you before formally applying.
4. Fill out a prequalification form
To receive a loan offer, you must provide the lender with your financial information. Prequalification forms differ by lender, but most require information about your:
- Current outstanding debt.
- Desired loan amount.
- Desired loan term.
- Credit score range.
- Reason for borrowing.
Once you receive your prequalified offers, review the interest rates and fees, loan terms, funding timeframe and borrower perks before committing to the loan and its terms.
Prequalifying with a lower credit score requires shopping around to find the best loan options for your credit profile.
Can you prequalify for a personal loan without affecting your credit score?
It is possible to prequalify for a personal loan without hurting your credit — look for wording that says “view rate without impacting your credit,” “no credit check” or “no hard inquiry required.”
Prequalification involves providing the lender with information about your income and employment and undergoing a soft credit check, which will not show up on credit reports and will not affect your credit score. The lender can then tell you your estimated APR, monthly payment, loan amounts and if you meet their basic requirements.
With a lower credit score, it may still be possible to prequalify with a cosigner or by improving your credit score first. Providing accurate information and taking the time to back it up with supporting documents can increase your chances of being prequalified.
Are prequalification and preapproval the same thing?
Prequalification and preapproval are often used interchangeably, but preapproval is typically related to the homebuying process. Prequalification is a preliminary stage of borrowing any kind of loan — including a home loan, auto loan or personal loan — in which a lender gathers basic financial information from the borrower to calculate an estimated amount of money they could afford.
Preapproval is a more formal step in which the lender goes through various steps to confirm the borrower’s financial information and credit history. In short, prequalification relies on the data that the borrower provides to the lender, while preapproval involves a formal loan application and further documentation of a borrower’s income, savings, and debt as well as a credit check.
How to get approved for a personal loan
If you are looking to get approved for a personal loan, you will need to prepare beforehand to increase your chances of getting the best offers. There are a few steps you can take to boost your odds of getting approved.
Review your credit report
Before applying for a loan, review your credit reports and dispute errors if you find any. List alternative income sources on your credit card application to give the lender a complete picture of your financial situation.
Improve your credit score
Having a good credit history will put you in a strong position for getting approved for a loan. Pay all your bills on time, keep credit card balances low and reduce your spending. Lenders count the most recent balance on your credit cards as if it is owed, even if you pay off the balance in full. Charging less on your credit cards will reflect favorably on your credit.
Check if you prequalify
It is always a good idea to check if you prequalify before applying. You can do this with a soft credit check, which will not affect your credit score. This is a great way to understand your options and terms.
Consider a cosigner or joint applicant
If you have a lower credit score, a cosigner or joint applicant with a higher credit score may help you get approved for a personal loan. The cosigner should be aware that they may need to repay the loan if you are unable to.
Determine if the loan is right for you
Before signing a loan, consider whether the personal loan fits your needs. It may be the right decision for your finances if you’re consolidating debt and the interest rate is lower than what you’re currently paying, or if you aren’t able to save for a bigger purchase. But even if it’s a necessity, make sure you’re getting the best deal before you sign.
The bottom line
Prequalifying for a personal loan is a great way to get personalized loan information without filling out a formal application. Use any of our steps above to increase your chance of prequalifying and finding the right lender.