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A personal loan is a one-time lump sum of money you borrow from a bank or online loan lender. You can use the loan funds to manage unexpected medical expenses, home repairs, or repay credit card debt. And like every other type of loan, you must get prequalified by lenders when applying for a personal loan.
Getting prequalified for a personal loan is a preliminary step in your loan approval process. Not only does it give lenders an insight into your creditworthiness, but it also gives you a snapshot of the loan you might receive when you’re finally approved. More importantly, getting prequalified for a personal loan doesn’t guarantee you a loan or the terms stated in the loan estimate.
Can You Get Prequalified for a Personal Loan?
Yes, like any other type of loan available to loan consumers, you can get prequalified by lenders when applying for a personal loan. While getting prequalified by a lender isn’t compulsory, it, however, gives you a ballpark estimate of the loan amount you’ll be receiving if approved.
In the following section, we’ll go into more detail on the steps to follow when looking to get prequalified for a personal loan.
>> More: How to Apply for a Personal Loan
How to Prequalify for a Personal Loan (Step-by-Step)
The process of getting prequalified for a personal loan will vary by lenders, but it often includes the following steps discussed in this section.
#1. Check Your Credit Score
Since personal loans are often unsecured, meaning they don’t require collateral, it is common for lenders to rely on your financial history when deciding on your eligibility. When getting prequalified for a personal loan, your credit score and history play a considerable role. Your credit score reveals your financial history, creditworthiness, and credit utilization to lenders.
It can be hard to prequalify for a personal loan or get an affordable personal loan if you have a poor credit score and history. That is why you must improve your credit score before applying for a personal loan.
#2. Make Sure You Can Afford a Personal Loan
While you may be taking out a personal loan to cover a critical need, but the main question is, can you afford one at the moment? Personal loans require specific upfront fees and monthly loan payments. These fees and payments can run into hundreds of dollars monthly which may negatively impact your financial budget.
Before taking out a personal loan, you should consider the steadiness of your employment and income. More importantly, it would be best to consider whether you can fit in another loan payment with your existing debt payments.
#3. Find a Lender that Offers Pre-Qualification
Not every lender offers a personal loan. So, if you want to get prequalified for a personal loan, you must search for a lender that offers personal loans and prequalifies borrowers. When searching for a lender that offers a personal loan, you should seek recommendations from family and friends.
Before reaching out to a lender, you must check for their online reviews to learn more about their services. More importantly, you should apply for a personal loan with multiple lenders.
>> More:Best Personal Loan Offers
#4. Compare Lenders
We always encourage our readers to shop around lenders, compare loan offers and estimates when looking to get any loan. And personal loans are no different. When looking to get a personal loan, you mustn’t settle for the first lender you approach, no matter how affordable the loan terms may seem.
When comparing lenders, you should consider the following factors:
- Loan Terms: The loan term you choose will determine your monthly loan payments. Most personal loans carry a loan term of around two to five years. So, when comparing lenders, you must find out the duration of the personal loans they are offering.
- Loan Amount: Typically, the loan amount you will receive or see in your pre-qualification letter will depend on many factors. It is common for personal loan lenders to arrive at a loan amount after evaluating a borrowers’ credit score, debt-to-income ratio, and income. While one personal loan lender may prequalify you for $30,000, another might prequalify you for $50,000. But you may never know if you are stuck with the first lender.
- Estimated APRs: The interest rate on a loan determines how much interest you’ll pay, but it doesn’t account for fees and other charges that you also owe. The annual percentage rate (APR) you receive in your loan estimate will give you a picture of the actual cost of your loan. If you’re comparing personal loan offers from different lenders, you should do the APR calculations yourself. For example, mortgage lenders might be able to exclude specific fees from their APR calculations.
- Fees: Aside from monthly loan payments and interest rates, personal loans come with several fees, including a personal loan origination fee. When comparing lenders, you must find out the cost of the fees associated with the loan. While some lenders may charge 3% of the total loan amount as origination fees, others may charge as little as 1.5%.
- Penalties: Most personal loan comes with prepayment and late payment penalties. Some lenders may charge 2% to 5% of the total loan amount as a prepayment penalty and 3% to 5% of the total monthly payment as a late payment penalty. However, some lenders may not charge any fee for paying off your loan early. You should find out from personal loan lenders whether or not the personal loans come with prepayment penalties.
- Collateral Required: Generally, personal loans are often unsecured, which means they do not require collateral. However, some lenders may request collateral or something of monetary value to back the loan. So, you must find from personal loan lenders whether or not their personal loans require collateral.
- Submit Personal Loan Prequalification Form Online: Thanks to technology and the internet, prequalifying for a personal loan is quite easy. These days, you can fill the personal loan pre-qualification form via a lender’s website. So, when prequalifying for a personal loan, you should visit the website of several personal loan lenders and submit a pre-qualification form with your necessary details. Most of the time, you will receive a pre-qualification letter from the lender based on the financial information you filled in the form within a few minutes of submission.
- Find out if you’re approved: A pre-qualification doesn’t guarantee you the loan. However, once you have filled and submitted the pre-qualification form, you may need to wait for a few hours to see if your pre-qualification was approved or denied. If the lender approved your pre-qualification and you’re happy with the amount, rate, and repayment term, then it is time to apply for a personal loan formally.
What Does It Mean to Prequalify for a Personal Loan?
If you’re applying for any loan for the first time, you may be asking, what does it mean for me to prequalify for a personal loan? Below is what it means to approach a lender and get prequalified for a personal loan.
- The process informs you if you are likely to be approved and what the terms will probably be if your full application is successful.
- You provide a lender with basic information, such as how much you want to borrow, how much income you earn, and how much debt you carry (though the requirements vary from lender to lender).
- The lender checks your credit to get an overview of your creditworthiness, looking at factors like your credit repayment history and recurring debts to assess the risk of lending to you. They run this credit check as a soft inquiry, which doesn’t impact your credit negatively.
- The lender provides you with an estimate of the loan details you are eligible for. If you like the loan amount, term, and interest rate you’re presented with, you can accept and proceed to complete the full application.
Why Should You Prequalify for a Personal Loan?
Below are several reasons why you should prequalify for a personal loan:
- Getting prequalified allows you to determine the potential of your personal loan application getting approved for what terms without hurting your credit score.
- Getting prequalified for a personal loan also gives you time to review the estimate and make sure you can afford the monthly payment.
- If your personal loan pre-qualification is denied, the lender may include a notice of what went wrong with your personal loan application and how to fix it.
What If I Am Not Approved for Personal Loan Prequalification? Denied.
Under certain situations, your lender may deny your personal loan pre-qualification. From poor credit score, high debt-to-income ratio, to unstable income, the reasons are numerous. If your personal loan application was denied, the Fair Credit Reporting Act requires your lender to send you an adverse action notice. The adverse action notice will explain why you were denied credit.
Here are some things you can do if your personal loan pre-qualification is denied:
- Improve your credit score to increase your chances of getting prequalified on your next attempt.
- Consider other financing options. If your purpose of taking out a personal loan is for home improvements, you may want to look into HELOC and home equity loans.
- Ask about a co-signer. If you have a friend or family member with excellent credit and financial standing, you may consider asking them to co-sign your loan.
Bottom Line: How to Prequalify for a Personal Loan
When searching for a personal loan, getting prequalified is worth the time it takes. It can allow you to compare lenders and loan terms to find your best option — and that can potentially save you some money in monthly payments.
If a lender doesn’t prequalify you, find out why so you can make some changes that can increase your chances of getting prequalified in the future.