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- Getting prequalified lets you explore your loan options without hurting your credit.
- Prequalification is a quicker process than getting preapproved for a personal loan.
- Your credit score and debt-to-income ratio will affect the rates and terms you receive on a personal loan.
If you’re facing a large expense but don’t have the savings to cover it, a personal loan can help. Personal loans come with lower rates than credit cards, and you can use the funds for just about any purpose.
Getting prequalified for a personal loan is usually fast and easy.
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What does it mean to prequalify for a personal loan?
Prequalification lets you explore different loan options without hurting your credit. It gives you an idea of the type of loan you might receive and enables you to comparison shop for the interest rates, terms, and other loan features. It should not, however, be confused with a loan preapproval, during which a lender takes a more extensive look at your credit.
“Getting prequalified is different from getting preapproved for a loan,” says Andrew Latham, a CFP® professional and director of content at SuperMoney, an online platform that compares financial services. “Prequalification is often the initial step in the loan approval process, where a lender provides an estimate of how much you might be able to borrow based on the basic financial information you provide.”
Getting prequalified is usually very quick, doesn’t require a hard credit check, and can be done online or over the phone. During the prequalification stage, it’s a good idea to compare offers from multiple lenders since it won’t have any impact your credit score.
In comparison, preapproval is a more involved process where your lender more thoroughly checks your credit — a process that is likely to lower your credit score temporarily — and verifies your financial and employment information. Once you’re preapproved, you’ll receive a loan offer that includes the loan amount, interest rate, and terms.
4 steps to prequalify for a personal loan
Here are the steps you’ll take to get prequalified for a personal loan.
1. Assess your financial situation and needs
Before applying for a personal loan, you need to know where you stand financially. Specifically, you want to know your credit score, your debt-to-income (DTI) ratio, and how much you can afford to borrow.
Your credit score has a big impact on the rates you receive. The higher your credit score, the lower your APR will be. It’s possible to qualify for a personal loan with a low credit score. But having a FICO score of at least 670 will give you the most options.
See Insider’s picks for the best personal loans for bad credit >>
Next, you’ll calculate your DTI ratio by adding up your total monthly debt payments and dividing them by your gross monthly income. The requirements will vary depending on your lender, but most lenders like to see a DTI ratio of 36% or lower.
“The lower your DTI, the less risky you appear to lenders because it indicates you have a good balance between debt and income,” Latham says.
Finally, you need to figure out how much you can realistically afford to borrow and repay each month. That way, you don’t end up applying for a personal loan that you can’t afford.
2. Research lenders
Before you begin the application process, take some time to research different lenders. Look at the APR ranges, loan amounts, and loan terms they advertise. It’s also a good idea to review their reputation to find out what kind of experience other customers have had.
And make sure you understand their eligibility criteria before you begin the prequalification process. For example, you may need to provide some basic information, like your employment and financial history.
3. Complete the prequalification form
Most lenders will let you fill out the prequalification form online. They’ll ask for some basic information, including your name, Social Security Number, address, employment information, and desired loan amount.
Once you fill out the form, your lender will do a “soft” credit pull, which won’t have an impact on your credit score. That’s why you can shop around for the best loan offers during the prequalification stage.
4. Evaluate prequalification offers
Once you’ve submitted the prequalification form and have been approved, your lender will send you a loan offer. And after you’ve applied with several different lenders, it’s time to evaluate the different offers you’ve received.
You’ll want to consider the loan amount, interest rate, and repayment terms. It’s also important to consider any potential fees associated with the loan.
For example, some personal loans come with origination fees which can cost between 1% to 5% of the total loan amount. That means a $20,000 loan could come with an origination fee between $200 and $1,000.
“I wouldn’t recommend going with a personal loan that has any fees other than an origination fee,” says Nathan Hoskin, Founder and Lead Advisor at Hoskin Capital. “For example, you should never take a personal loan out that has a prepayment penalty.”
Enhance your personal loan prequalification potential
If the loan offers you receive aren’t as good as you’d hoped, here are some steps you can take to strengthen your application:
- Improve your credit score: Lenders offer the best interest rates to borrowers with high credit scores. You can improve your credit score by paying your bills on time and reducing your overall debt.
- Take out a secured loan: Secured loans tend to come with lower interest rates since you’re less of a risk to your lender. But you should only put down collateral if you’re confident in your ability to repay the loan.
- Shorten the loan term: Choosing a shorter loan term may lead to lower interest rates. This will increase your monthly payments, but it’ll also reduce how much interest you’ll pay over the life of the loan.
- Consider a co-signer: Applying for a personal loan with a creditworthy co-signer will improve your odds of approval and help you secure a lower interest rate.
Prequalifying for a personal loan FAQS
What is the difference between prequalification and preapproval for a personal loan?
Prequalification tends to be a fairly simple process and involves a soft credit inquiry. In comparison, preapproval is a more comprehensive application process and usually involves a hard inquiry. Prequalification is a better option if you want to shop around for different loan options without hurting your credit.
Does personal loan prequalification affect my credit score?
No, when you get prequalified for a personal loan your lender will do a soft credit inquiry. That means you can apply for multiple loan offers without hurting your credit score. Loan preapprovals, on the other hand, involve a hard credit check, which is likely to slightly reduce your credit score temporarily.
How long does it take to prequalify for a personal loan?
The length of time will vary depending on your lender and the application process. If you apply online, many lenders will let you know if you’re approved within minutes.
Can I prequalify for a personal loan with bad credit?
Yes, some lenders specialize in working with borrowers with bad credit. But borrowers with good credit will qualify for the best rates and terms on a personal loan.
Does preapproval guarantee a personal loan?
Getting prequalified isn’t a guarantee you’ll get approved for the loan — it’s only meant to give you an idea of the type of loan you might receive. Getting preapproved is usually a stronger indication that you’ll be approved for the loan, but it does not guarantee you’ll get the loan.