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 a personal loan is and why you might use one
- What it means to be pre-approved for a personal loan
- The process of personal loan pre-approval
- Why it's important to get pre-approved?
- What you should do after you're pre-approved?
- What to do if you can't get pre-approved?
- Ways to increase your chances of being pre-approved
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.
Why is it important to get pre-approved for a personal loan?
Prequalifying for a loan doesn’t hurt your credit score, so it’s a good idea to get prequalified with the lender you are considering. Doing so allows you to compare personalized, estimated APRs across multiple lenders, as well as possible loan amounts, repayment terms, and monthly payment amounts.
Getting pre-approved and knowing all of this information as you shop for lenders can help you more accurately compare and find the best loan option for you and your situation.
What should you do after you are pre-approved?
Prequalification can help you shop and compare, but getting preapproved doesn’t necessarily mean you’ll be approved for the actual loan. It’s also not an official application for the loan.
Once you’ve gotten prequalified with several lenders and have compared all of the details, choose the best lender and offer for you. Then, submit an application for the loan directly with the lender, including providing supporting information and documentation and consenting to a hard credit inquiry.
Next, the lender will verify your information and as long as you meet their qualifications and they like what they see, they will approve the loan. Once that happens, the lender will disburse the funds to your bank account and you can use them as cash. Or, if you’re consolidating debt, the funds will likely be sent directly to creditors to pay off those debts.
What if you can’t get pre-approved?
Sometimes, you may go through the prequalification process and be turned down for the loan. If this happens, there are a few things you can do to help you get approved in the future:
- Contact the lender for more information. Reach out to the lender directly and ask if they will provide an explanation of why you were denied. Use this insight and feedback to improve your chances for next time. For example, if you were denied because of your credit score, you can take steps to improve your score.
- Check your credit score and report. You can check your credit score for free in a variety of ways, and doing so can help you understand if you meet minimum credit score qualifications or if you need to improve your score. You can also take a closer look at your credit report to ensure there are no errors.
- Explore alternative financing options. A personal loan is not the only way to get funds to finance a large purchase, project, or event, or consolidate debt. Check out alternatives like home equity loans (HEL), home equity lines of credit (HELOC), credit card balance transfer, or a 0% APR credit card. You may have better luck meeting those qualifications.
- Apply for a secured personal loan, or with a cosigner. A secured personal loan requires you to provide assets as collateral, lowering the risk the lender is taking by approving your loan application and increasing the likelihood you’ll be approved. The downside is if you aren’t able to repay the loan, the lender will seize your assets.
You can also apply for the loan with a cosigner. This means that both you and the cosigner are responsible for the loan getting repaid. If you are unable to make payments, the cosigner is promising they will make the payments instead. Again, this helps lower the risk the lender is taking on and can improve your chances of approval.
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.
No. Even if you prequalify for a loan, it doesn’t mean you’ll be approved. That’s because prequalification is based only on what the person reports, while actual approval examines information in greater detail, including employment status, income, debt, credit reports, and other factors.
Yes, you can get prequalified for a personal loan with multiple lenders without impacting your credit score.
Most lenders prefer borrowers to have good or excellent credit scores, at least 690 and above. Some lenders accept borrowers with credit as low as 630, but you’ll pay higher interest rates. The lowest score typically accepted is 560, but it can vary by lender.
Lenders that offer prequalifications typically let you know your status immediately. You may be asked to submit additional information to confirm you qualify as part of the application process, which can add one or two days to the process.
No, prequalification triggers a soft credit inquiry, which does not affect your credit score. There is no risk to your credit by getting prequalified.
Yes, if there are any discrepancies between what you report and what the lender finds, or they come across information they don’t like, a lender can deny your loan even if prequalification was previously granted.