What is personal loan pre-approval?
Lenders can assess and pre-approve your financial information before you begin the official personal loan application process.
Personal loan pre-approval refers to a quick way to find out whether you're likely to be approved for a personal loan, but it's not a loan offer. It's also more typically referred to as prequalification. Pre-approval, on the other hand, usually applies to other loan types, like mortgages. To improve your loan-buying experience, it's important to understand how prequalification works.
What is personal loan pre-approval?
A personal loan pre-approval is more commonly called prequalification. It's the process by which lenders assess your financial information to estimate the interest rates and terms they're likely to offer you before you complete a full application. Lenders review your credit history via a soft credit inquiry, as well as information you report on a brief questionnaire. This information typically includes your annual income, level of education, current debt, how much money you want to borrow, and what you intend to use the loan for. The process doesn't require supporting documentation and may take less than 10 minutes to complete.
A personal loan pre-approval or prequalification is not a guarantee you'll qualify for the loan. Your loan request could still be rejected once you complete the formal loan application. But it's a good way to compare rates between lenders before applying. Note that when you apply for a loan, the lender will conduct a hard credit inquiry which could temporarily damage your score by a few points.
Pre-approval vs. prequalification
You might think that pre-approval and prequalification are the same, but they're often not. Both are ways to find out the interest rates and loan terms you might qualify for. But one takes only minutes and doesn't impact your credit score, while the other process can take much longer and may ding your score by a few points. Prequalification involves a soft credit check, whereas pre-approval (for a mortgage, for example) generally requires a hard credit check. A hard credit check can temporarily hurt your credit score.
The prequalification process is simpler and only involves a review of basic information without supporting documentation. It's commonly an option for personal loans, auto loans, and credit cards. Pre-approval, however, requires documentation like your bank statements or tax returns. Because the pre-approval process is more detailed, it generally provides a more accurate estimate than prequalification does. It's also a much longer process that can take days, whereas prequalification may only take minutes.
Neither pre-approval or prequalification are offers of credit, and the final rate you receive after you formally apply may be higher.
How to prequalify for a personal loan
Follow the steps below when looking for a personal loan.
1. Review your credit report: Before applying for pre-approval, you want to make sure your credit report is as healthy as possible. You can do this by fixing any errors on your report. You can request a free copy of your credit report, dispute any errors, and have them removed before you apply for pre-approval.
2. Shop around: Research a few different sources of lenders (online, banks, credit unions) before you start the pre-approval process. That way, you’ll get an idea of what lender is most likely to offer the lowest interest rates and fees.
3. Gather the necessary paperwork: Now is a great time to pull together any documentation you’ll need to submit during the application process. This is a good way to double-check your key information and can help speed up the application process. You’ll likely need to submit forms of identification, pay stubs or tax forms, bank statements, and any other loan agreements you may have.
4. Pursue multiple pre-approvals: Complete a few different pre-approvals to see which lenders are most likely to offer the best rates and terms.
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FAQ
Does pre-approval affect your credit?
If you want to avoid a hard credit inquiry — which can negatively affect your credit score — consider prequalifying rather than pursuing pre-approval. Prequalifying usually involves only a soft credit check, whereas pre-approvals typically involve a hard credit check. It can be worthwhile to shop around and get prequalified with several lenders so you can compare rates.
Usually, a hard inquiry only impacts your credit score negatively for a few months, but the inquiry will remain on your report for a few years.
Can you get pre-approved with bad credit?
You can get pre-qualified for a personal loan even if you have bad credit, but it’s generally more challenging to do so. If your credit score is on the low end, you may not be successful during the pre-approval process. It’s best to improve your credit score as much as possible before starting.
Usually, lenders look for a 670 credit score in or above the good range. If your credit needs some work, consider researching credit unions, as they tend to be more lenient to borrowers, but you’ll most likely have to become a member first. You can also look for lenders specializing in loans for consumers with bad credit, but expect to pay higher interest.
How long does pre-approval take?
The pre-qualification process for personal loans takes only minutes, while it can take up to a few days for the lender to formally approve your application. If you’re in a rush, ask the lender what its typical prequalification timeline looks like to get a better idea.
How to improve your chances of pre-approval
If you’re getting ready to take out a personal loan, here are a few ways you can increase your odds of prequalifying and getting approved for a loan:
- Increase your credit score: The higher your credit score is, the easier it will be to achieve pre-approval. What’s more, having a higher credit score leads to better interest rates and terms. You can boost your credit history and score by practicing healthy credit habits and consistently paying bills on time.
- Pay down debt: Having a high debt-to-income ratio (DTI) can hurt your chances of pre-approval. Pay down as much debt as possible to give yourself a leg up. Most lenders prefer a DTI of 36% or less.
- Increase your income: The higher your income, the more confidence lenders will have in your ability to make your monthly payments on time. If you’re ready to make a career move, this could be a good time to do it. Or, consider a side gig to bring in extra cash.