At a Glance
Common types of loans include student loans, home loans, and auto loans. But what if you need money unrelated to the purchase of a specific big-ticket item like a home or an automobile? That’s where personal loans come in.
Personal loans are used less frequently than other types but can be the right move in certain circumstances. Getting pre-approved for a personal loan is the first step of the loan process, and we’re here to help you understand how to do it.
In this article, you’ll learn:
What is a personal loan and why might you use one?
Personal loans are unique in that they don’t have a pre-defined use the way auto loans or mortgages do. Lenders issue personal loans to individuals who need to borrow money for any number of reasons, including debt consolidation, emergency expenses, or as an alternative to a payday loan.
The most common reason for getting a personal loan is to consolidate debt. If you plan to make payments on time, it can be a smart move as most personal loans have lower interest rates than credit cards.
In the first quarter of 2020, the average interest rate for a 24-month personal loan was 9.63%.1 Compare that to 15.09% for credit cards. In addition to saving on interest, consolidating multiple outstanding balances to a single personal loan can save time, hassle, and potential missed payment fees from trying to manage several accounts.
What is personal loan pre-approval?
Before you borrow money, lenders want to make sure you’re a worthy borrower. They do this for free by gathering necessary personal information like your employment status and income, and by assessing your credit score through a soft pull (which does not negatively impact your credit score the way a hard inquiry does).
If a lender deems you an acceptable risk, they may pre-approve you for a loan. The lender will offer you an unofficial look at the rates and amount of credit you may be eligible for. You can gather multiple pre-approval offers to shop around before choosing a lender.
It’s important to note that personal loan pre-approval is not a guarantee that you’ll get a loan, nor does pre-approval signal your commitment to taking a loan with that particular company. Pre-approval is simply a way for you to understand if you meet eligibility requirements for a loan, and if so, how much money you may be able to get at what rate.
What is the process for personal loan pre-approval?
The first step is to shop around to find the lenders you most want to receive a personal loan from. Then, once you provide a bit of personal information, including the reason for the loan, the lender will perform a soft credit inquiry. Assuming the process is completed online, an algorithm will determine your eligibility and either present you with pre-approved rates or turn you away.
Thanks to the magic of the internet, most applications for pre-approval take only a few minutes. If you like the pre-approved offer and are interested in obtaining a loan, additional paperwork and final approval will follow.
How can you increase your chances of being pre-approved for a personal loan?
The best way to increase the likelihood of being pre-approved is to boost your credit score. A good credit score not only helps for personal loans, but mortgage, auto, and credit card applications as well. Because personal loans are unsecured—meaning they do not require collateral like a home or vehicle—lenders must rely on your creditworthiness to issue pre-approval.
Strategies to increase your credit score include:
- Making on-time payments for all lines of credit
- Keeping credit card balances low
- Monitoring your credit reports
- Maintaining a steady income to keep debt-to-income ratio low
Each of these factors help to make you a less risky borrower.
Personal loans can be an excellent tool to gain access to cash when you need it. By keeping your finances in order, you can raise your chances of getting pre-approved for a personal loan.