How to prequalify for a personal loan, and why it matters

Prequalifying for a personal loan is a great way to get personalized loan information without affecting your credit score. Most lenders offer prequalification. Fill out prequalification forms from several lenders to compare multiple personal loan rates and terms.

There are a few steps you can take to increase your chances of prequalifying and subsequently getting approved: Increase your credit score, make sure you meet the lender’s minimum eligibility criteria and have all the proper information on hand.

4 steps to prequalify for a personal loan

Take the following steps when prequalifying for a personal loan for a smooth and successful application process.

1. Check your credit score

Check your credit score before applying to know which lenders are most likely to approve you. Applicants with credit scores of 740 or higher are more likely to get the best rates and terms, but those with lower credit scores still have options, as there are lenders that cater to borrowers with bad credit and fair credit.

If your credit score seems to be the primary reason you don’t qualify, take steps to improve your score before reapplying.

2. Determine your budget

In addition to your credit score, lenders will consider your income, available credit and current debt obligations — also called your debt-to-income (DTI) ratio — to determine your maximum and minimum loan amounts.

To determine your budget, you can calculate your DTI by comparing your monthly debt payments to your gross monthly income. Before applying, make sure you meet the lender’s DTI requirement (if listed) and that another monthly payment can fit comfortably into your budget.

3. Research lenders

Research lenders that work with your specific credit range. Some lenders cater their products to borrowers with specific scores, from those with poor credit to those with excellent credit.

You can either visit each lender’s website and go through the prequalification process or use a loan marketplace, which shops your info around with multiple lenders. Comparing rates from several companies can help you determine which lenders are most likely to approve you, and ultimately, help you find the best loan.

4. Fill out a prequalification form

You must provide the lender with your financial information to receive a loan offer. Prequalification forms differ by lender but typically require a few key pieces of information.

• Income
• Current amount of 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.

Advantages of prequalifying for a personal loan

Getting prequalified makes sense for a few key reasons:

• Protect your credit score: Prequalification requires a soft credit pull, which doesn’t affect your credit score. With a soft inquiry, the lender gets a general idea of your history with credit, and in return, you get a sneak peek at the rates you may receive. To be officially approved, you’ll eventually need to submit to a hard credit check, which will ding your score by about five points.
• Streamline your search: In most cases, you can get prequalified in under five minutes, and you won’t need to provide any supporting documentation. This quick process can help you weed out lenders that aren’t a good fit without jumping through all the hoops of applying.
• Apply with confidence: While prequalification doesn’t guarantee final approval, it’s a good indication that a lender is likely to approve your loan request. Plus, you’ll determine whether a lender’s rates and terms match your borrowing needs.

Are prequalification and preapproval the same thing?

Prequalification and preapproval are often used interchangeably, but they’re not the same.

Prequalification is a preliminary stage of getting a loan — including a home loan, auto loan or personal loan — in which a lender gathers basic financial information from the borrower and runs a soft credit check. You’ll receive an estimated loan amount and annual percentage rate. However, this is not a final offer; the terms may change if you formally apply, depending on what the lender finds in your financial and credit history.

Preapproval is a more formal step in which the lender confirms the borrower’s financial information and credit history. It requires a hard credit check, which will temporarily drop your credit score by about five points. A preapproved offer is a formal offer — it shows you the exact terms you’ll receive if you accept the loan.

In short, prequalification relies on a few data points the borrower provides to the lender, while preapproval involves a formal loan application.

How to improve your odds of personal loan prequalification

Here are a few steps you can take to help increase your chances of prequalifying for a personal loan:

• Review your credit report. Before prequalifying with a lender, review your credit reports and dispute errors that could be dragging your score down.
• Improve your credit score. Pay all your bills on time, keep credit card balances low and avoid applying for new credit.
• Consider a co-signer or joint applicant. If you have a lower credit score, a cosigner or co-borrower with a higher credit score may help you prequalify for a personal loan.

What to do if you don’t qualify

If your application is denied, lenders are required to send an adverse action notice to explain the factors that led to your rejection. Review this letter to identify the areas that need improvement to help boost your approval odds when you reapply.

In the meantime, consider using a loan marketplace to compare multiple lenders at once. While the first lender may not be a good fit, prequalifying with additional companies may reveal a better option. Keep in mind that not all lenders are available on loan marketplaces — so while they’re a good place to start, you should also consider non-partner lenders.

Bottom line

Prequalifying for a personal loan is a great way to get personalized loan information without undergoing a hard credit check and formally applying. To make the process more seamless, prequalify with multiple lenders to get an idea of what a competitive offer looks like for your credit situation.

Frequently asked questions about loan prequalification

• 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. Be sure to have a copy of your recent pay stub and tax returns handy. The lender will also request your contact information, Social Security number and your current employer’s name, phone number and email address.

• Can you prequalify for a personal loan without affecting your credit score?

  Yes, it’s possible to prequalify for a personal loan without hurting your credit. 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. Look for phrasing like, “view rate without impacting your credit,” “no credit check” or “no hard inquiry required.”

  Keep in mind that you must eventually agree to a hard credit check to receive a loan from a reputable lender. That hard credit inquiry will drop your credit score, but the effect is typically minimal and temporary.

• What can you do if you can’t get prequalified for a personal loan?

  If your initial attempts to prequalify for a personal loan fail, try one or more of these strategies:

  • Apply with a different lender type: Online lenders and credit unions may have more flexible qualification requirements.
  • Try a loan marketplace: A loan marketplace shares your information with multiple partner lenders — sometimes dozens at once.
  • Request a smaller loan amount: Asking for less money may make you seem like less of a risk to lenders.
  • Pay down existing debt first: You may need to reduce your current debt load for lenders to trust your ability to repay a new loan.
  • Explore alternatives: If these strategies fail and you urgently need cash, check out personal loan alternatives, like using a credit card or tapping your retirement savings.