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How to Prequalify for a Personal Loan

  • If you’re looking into how to get a personal loan, it’s helpful to prequalify first to determine how much you can afford to borrow.
  • Loan prequalification helps you understand your chances of being approved for the best personal loans.
  • A prequalified offer isn’t the same as a preapproved loan, so make sure you understand the subtle differences.
  • To increase your odds of approval, pay down your debt, offer to secure the loan with collateral or ask a loved one to serve as a co-signer on the loan.
  • Always compare rates and get a personalized quote based on your credit score with a banking app like MoneyLion before you apply.

Wouldn’t it be great if you had a Magic 8 Ball to tell you which bank is most likely to approve you for a personal loan?

Well, you may not have a Magic 8 Ball, but you can go through the prequalification process. When you prequalify, you find out if a lender is likely to approve or deny your formal loan application. Learn more about this process and find out how it differs from personal loan preapproval.

What does it mean to prequalify for a personal loan?

When you apply for a personal loan, the lender does a credit check to determine if you’re likely to pay back the money you borrow.

This puts a “hard inquiry” on your credit report, which may cause your credit score to drop a few points. If you don’t want an extra inquiry on your record, you can get prequalified before you submit an application.

prequalification helps you understand how much a bank, credit union or finance company is?willing to lend you?based on your income, credit history and other factors. Most lenders do a soft check instead of a hard check, leaving your credit score intact while you explore your loan options.

Prequalification vs. preapproval

Loan prequalification is a little different from loan preapproval. When you go through the prequalification process, you give the lender a big-picture view of your finances. Generally, you list your income, debts and assets.

Preapproval is a little more rigorous. Rather than just telling the lender how much you earn or how much debt you have, you must provide proof of income, employment and assets. During this process, the lender checks your credit.

Neither process is a guarantee of loan approval. You still have to complete an application and go through the other steps in the application process.

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Why should you get prequalified before applying for a loan?

Here are the top reasons to get prequalified before you apply for a personal loan:

How to get prequalified for a loan

When you’re ready to get prequalified, follow the steps below:

Consider your financial situation and needs

Before you shop for a lender, make sure you know your credit score and debt-to-income (DTI) ratio. Many lenders use FICO scores, but your lender may request your VantageScore. Both models use your payment history, total amount of debt and other factors to determine your credit scores.

The United States has three major credit bureaus: Equifax, Experian and TransUnion. Due to differences in each scoring model, it’s possible to have a credit score that’s much higher at one bureau than it is at another bureau. For example, you can have a 770 FICO score at TransUnion while scoring just 715 at Experian.

Your?DTI?ratio compares how much debt you have to how much gross income you have. To calculate your DTI, divide your monthly debt payments by your gross monthly income. For example, if you have $4,000 in gross monthly income and $560 in minimum monthly debt payments, you have a DTI of 14%.

This ratio helps lenders understand how much you can afford to pay each month. The lower your DTI, the more wiggle room you have in your budget. Although it’s best to have a?DTI below 20%, many lenders approve applicants with DTIs as high as 36%.

Research and compare lenders

Some lenders offer much better loan terms than others. Before prequalifying, shop around to determine which lenders offer the best rates and lowest origination fees.

Fill out the prequalification form

When you’re ready to prequalify for a personal loan, you’ll have to fill out a form with your name, contact information, date of birth and Social Security number. The lender will also ask for your income, desired loan amount and desired loan term. Your loan terms have a big impact on your interest rate, so think carefully before you submit the form.

Undergo a soft credit check

Next, the bank conducts a soft check of your credit. A soft check is a?review of your credit history that has no impact on your credit score. It’s different from a hard credit check, which does affect your score. This helps your loan officer determine if you’ll likely meet the lender’s requirements for a personal loan.

Evaluate your offers

Since a soft check has no impact on your credit, it’s wise to prequalify with several lenders and then compare the loan offers you receive.

Once you have these offers in hand, compare them by taking the following steps:

After getting prequalified

To get approved after prequalification, a borrower must follow these steps:

  1. Apply for a personal loan. You may have to provide additional financial information to help the lender determine if you qualify. For example, a bank may ask a borrower for pay stubs and W-2 forms to verify their income.
  2. Undergo a hard credit check. Once you complete the application, the lender does a credit check to make sure that you meet the loan requirements. There’s nothing you can do here except wait for the lender to receive your credit history and review it.
  3. Give the lender additional information as requested. For example, you may have to show your ID to prove your identity.

If you’re approved, check the loan agreement carefully before signing it. Make sure it has the right loan amount, interest rate, origination fee and repayment term. Once you sign, the lender will fund your loan by giving you a check or depositing the funds into your bank account.

If you’re not approved

If the lender denies your application, you’ll receive a letter telling you the reason for the denial.

This is known as an adverse action letter. The notice should also include your current credit score and the name of the agency that provided your credit report. Review this letter carefully to understand why you didn’t qualify for the loan. Once you know the reason for the denial, you can work on improving your credit score or developing it if you have no credit history.

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How to increase your odds of approval

Here’s how to increase your chances of approval as a borrower:

FAQ: How to prequalify for a personal loan

Does prequalification hurt your credit score?

No. The lender does a soft credit check, which has no impact on your score.

Can you prequalify for a personal loan if you have bad credit?

Some lenders specialize in personal loans for bad credit, so it’s possible to get a loan even if you have a low credit score. See our guide on bad credit and low income loans.

What is the difference between prequalification and preapproval?

Prequalification is a preliminary check, while preapproval allows the lender to dig deeper into your financial history.

Does prequalification guarantee you’ll be approved for a loan?

No. Even if you’re prequalified for a loan, there’s no guarantee the lender will approve you once you submit an application.

About the Author

Leigh Morgan
Leigh Morgan Personal Finance

Leigh Morgan is a seasoned personal finance contributor with over 15 years of experience writing on a diverse range of professional legal and financial topics. She specializes in subjects like navigating the complexities of insurance, savings, zero-based budgeting and emergency fund development.

In the last five years, she’s authored over 300 articles for credit unions, digital banks, and financial professionals. Morgan is also the author of “77 Tips for Preventing Elder Financial Abuse,” a book focused on helping caregivers protect the elderly from financial scams.

In addition to her writing skills, she brings real-world financial acumen thanks to her previous experience managing rental properties as part of a $34 million real estate portfolio.

About the Reviewer

Blake Esken
Blake Esken Los Angeles Times

Blake Esken has over 15 years of experience in product management and has been a member of the Los Angeles Times staff for over five years.

As part of his role at the Los Angeles Times Commerce Team, Blake acts as the in-house reviewer and fact checker for LA Times Compare. He supervises all content for compliance and accuracy and puts to use skills he has honed through years of experience managing high-stakes projects for a range of industry-leading companies.

He has a strong background in data analysis, compliance, and communication, which allows him to support LA Times Compare through fact-checking in an effort to provide up-to-date and factual information across our content.

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