If you need more money for a large expense than you have saved in the bank, a personal loan could come in handy. Personal loans are instalment loans that are typically unsecured, and they can serve many purposes, from consolidating high-interest debt to paying for home repairs or a costly medical procedure.
Personal loans can have lower interest rates than credit cards and they offer the flexibility of using the funds as you see fit. But getting approved for a personal loan—especially one with a low interest rate—can be challenging if your credit isn’t in great shape. When you prequalify for a personal loan, you can get a snapshot of what you could qualify for, which can help you make financial decisions. The best part is the prequalification process doesn’t hurt your credit score.
What it Means to Prequalify for a Personal Loan
When you go through the process of prequalifying for a personal loan, the lender essentially prescreens you before you complete an application. The process informs you if you are likely to be approved and what the terms will probably be if your full application is successful.
When you start the personal loan prequalification process, you provide some basic information to a lender, such as how much you want to borrow, how much income you earn and how much debt you carry (though the requirements will vary from lender to lender).
The lender then checks your credit to get an overview of your creditworthiness, looking at factors like your repayment history and outstanding 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.
When you get prequalified successfully, the lender will provide you with 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.
But know that getting prequalified doesn’t guarantee you will be approved; you still have to apply and provide additional documentation and information that could change the lender’s decision or offer. Upon application, the lender will also most likely run a full credit check, which does put a hard inquiry on your credit report.
Prequalification vs. Preapproval
You’re likely to hear both of these phrases when it comes to applying for loans and credit cards. Some lenders use the terms interchangeably, according to credit bureau Experian, while others assign different meanings to each. Ultimately, both indicate a process where a lender gives you conditional acceptance of a financial product in advance, pending a full review of your finances and credit report.
In general, prequalification may be less rigorous and require less up-front information than a preapproval. Sometimes if you receive a pre-approval offer in the mail, such as for a credit card, it means you’ve been prescreened and are being offered specific terms (though it may be a range).
In both instances, if you want to proceed with the loan, you still need to complete an application, and the lender will run a full credit check. Similar to prequalification, preapproval does not guarantee that you will actually be approved once the lender reviews your complete application.
Why You Should Get Prequalified
When you apply to prequalify for a loan, you get the chance to find out if you’re likely to be approved or not, and at what terms, without it hurting your credit. This means if you are turned down, or if you are prequalified but don’t feel happy with the terms offered, there’s no negative impact to you. It also means there’s no harm in getting prequalified by multiple lenders so you can compare your options and find the best deal.
Getting prequalified for a personal loan also gives you time to review the estimate and make sure you can really afford the monthly payment. Personal loans usually have fixed interest rates, so your payment would be the same each month. This predictability can be helpful, but you need to do the math and ensure the monthly payments would fit into your budget before you commit. Some lenders offer various options, with different terms that change the monthly payment amount. You can take the time to figure out what works best for your wallet.
Keep in mind that your credit score plays a huge role in whether you can prequalify and ultimately get approved for a loan. It also impacts your loan’s terms—especially your interest rate. If you’re disappointed with the interest rates you receive in the prequalification process, and you’re not in a huge rush to get the loan, you could pause and spend some time working to improve your credit before you take out a loan. You can go through the prequalification process again later once your credit score increases, and you might receive better loan offers.
How to Get Prequalified
There are a few different ways to get prequalified for a personal loan online. You can go directly to the website of a lender, whether a traditional bank or online-only lender, and go through the prequalification process quickly. You can also go to a website that aggregates loan options, where you put in some basic information and can get prequalified from various lenders at once. This makes the comparison shopping process a little easier.
Look for terms like “check your rate” or “check your loan options,” which indicate prequalification. You can also look for verbiage that says it won’t affect your credit, which also shows that it’s just a prequalification. Keep in mind that the prequalification process is just about getting a quick screening and an initial quote. Once you see language like “apply now,” it’s geared toward those ready to submit a full loan application (which does impact your credit).
Next Steps After Getting Prequalified
Once you get prequalified for a personal loan, review the offer. Take a close look at the total loan amount, interest rate and term (how long you have to repay the loan). Review the estimate for your monthly payment to make sure it works for you.
While some lenders don’t provide much fee information in the prequalification process, it’s smart to check if you’ll have to pay an origination fee or a prepayment penalty fee. If you’re not sure what fees come with the loan, don’t hesitate to contact your lender and ask before you proceed with applying.
If you’ve gone through the prequalification process with multiple lenders, compare the offers to see how they stack up. Once you’ve chosen the loan you want, you’ll want to formally apply for a personal loan, which may require additional information such as income verification, tax forms or bank statements. The lender will also run a credit check, which puts a hard inquiry on your credit report.
You will then be notified if you’re officially approved for the loan. Upon approval, you should review the loan documents and all of the final terms to make sure they work for you. Again, look carefully at the fees. Some lenders charge origination fees as a small percent of the loan, which can either be rolled up into the APR or taken out of the loan before the funds are dispersed. This can come as a surprise if you’re not expecting it, so pay close attention to the fine print before you accept.
If you decide to proceed, you’ll accept the loan and sign the paperwork committing you to the loan and its terms. The lender will then disperse the funds to you, which can take anywhere from a few hours to a few days, and the repayment clock begins ticking.