How to prequalify for a personal loan

In a nutshell

Prequalification gives you a quick estimate of whether you will qualify for a loan. If you’re looking around for a personal loan which allows you to better assess your options before you agree to one.

• Personal loan prequalification lets lenders quickly check your finances to see if you might qualify for a personal loan, without affecting your credit score.
• Prequalification offers a basic estimate, while preapproval involves a comprehensive review, including a hard credit check.
• Check with different lenders before applying for a loan to make sure you're getting the best interest rate based on your credit and financial background.

Why you should get prequalified

Prequalification for a personal loan is like giving lenders a sneak peek into your financial world. You share details about things like your monthly income, job status, credit score and the loan amount you're considering. Lenders examine these details to gauge your reliability as a borrower. In exchange, you gain insight into your likelihood of qualifying for a loan.

But here's the deal — getting prequalified doesn't guarantee loan approval. Think of it as testing the waters to gauge lender interest. However, prequalification typically involves only a soft credit check, meaning your credit score remains unaffected.

Prequalify vs. preapproval

When exploring personal loan options, you'll encounter terms like "prequalification" and "preapproval." While the terms sound similar, they carry distinct meanings.

Prequalification is like giving a snapshot of your finances. You share basic details about your income, job, and financial situation, and in return, the lender gives you a rough idea of how much you could borrow. This process involves a soft credit check, so it won’t affect your credit score.

On the other hand, preapproval is a more detailed process. It can take about ten business days because the lender carefully reviews your financial history, such as your pay stubs, W-2s and tax returns. Be ready for a hard credit check, which might temporarily affect your credit score. The advantage is that you'll receive a definite estimate of exactly how much you can borrow. Additionally, preapproval signals to sellers that you're serious and financially prepared for a significant purchase.

Deciding between prequalification and preapproval depends on your circumstances. Prequalification is handy if you're just checking out your options for something like fixing up your house or buying a car. But if you're all set to buy a specific car or property and start negotiating, then preapproval is the way to go. It gives you a solid advantage by showing sellers that you're serious and ready to borrow.

The six steps to prequalify for a personal loan

Step 1: Fill out prequalification forms

You can generally prequalify for a loan online, so start by filling out the prequalification forms that lenders offer. They're usually pretty easy to fill out. You'll just need to share some basic info like your name, Social Security number, address, how much you earn, where you work and how much you're looking to borrow.

Here's a tip: don't shy away from applying with a few different lenders. It's a smart move because personal loan offers can vary quite a bit between lenders. By exploring your options with multiple companies, you're more likely to find a loan that fits your needs.

And here's the best part: applying for prequalification won't negatively impact your credit score. This means you can complete multiple prequalification forms without worrying about adverse credit effects.

Step 2: Undergo a soft credit check

During prequalification, lenders typically conduct a soft inquiry into your credit. This type of check allows them to review your credit profile without causing any harm to your credit score.

Step 3: Get a qualification decision

Once the lender has had a chance to look over your prequalification form and check your credit, they'll let you know if you’re qualified. They'll provide details like the estimated loan amount, interest rate and monthly payment. Keep in mind that this decision isn't set in stone, but it gives you a pretty good sense of whether you're likely to secure the loan.

If you face repeated rejections during the prequalification stage, it might be time to give your financial profile a tuneup. There are a few steps you can take, like working on improving your credit score, offering up collateral to back the loan or bringing in a cosigner who's willing to share the responsibility of the loan and step in if you happen to miss a payment. All of these will improve your chances of qualifying for a loan.

Step 4. Compare your options

When you're weighing your loan options, it's important to take the time to compare them in detail. Review the terms, interest rates and fees attached to each offer. What's most important is whether you aim for a bigger loan to cover all your expenses or are focused on snagging the lowest interest rate and monthly payment. Considering these factors will help you decide which offer suits you best.

A quick heads-up: instead of providing a straightforward interest rate, your offer may include the loan's annual percentage rate (APR). Don't let this term throw you off — it simply reflects how the interest rate and any additional fees contribute to the overall cost of borrowing each year you have the loan.

Step 5. Select a loan and apply

Once you’ve picked the offer that fits your needs, you can apply for a personal loan with that lender. You’ll submit more information to confirm your financial circumstances, and the lender will carry out a hard credit inquiry. This means the lender will carefully assess your credit and notify the credit bureaus that you’re looking for a loan, creating a mark on your credit report.

While prequalification doesn’t mean you’ll automatically get a personal loan, it may improve your chances of getting the loan when you choose to apply.

Step 6. Receive your money

After you accept the terms of the loan agreement, the lender will send the funds to your bank account. Depending on the lender's procedures, this process may take a few business days.

What if you don’t qualify?

If you get turned down for a personal loan, it's probably because your financial or credit profile needs some work. The good news is that lenders usually tell you why and give some advice on how to improve for next time.

There are usually three main reasons why loans get denied: your credit score, your income and how much debt you have.

Lenders might say no if your credit score is low because of late payments or significant credit card balances. You can boost your score by checking your credit report for mistakes, paying off debts and ensuring you pay on time in future.

Having a stable income is also very important for getting approved. If your income is low or not steady, lenders might hesitate. Getting a new job or finding a way to make your income more reliable could help.

Lenders also look at your debt-to-income ratio, which compares how much you earn to how much you owe each month. They like to see that you're not drowning in debt, so aim for a 30% or less ratio.

If you're having trouble improving your finances, consider asking someone to co-sign. This person backs you up and makes you more likely to get approved. If your finances need work, refrain from immediately reapplying for a loan. Take time to address issues and strengthen your financial profile before trying again.

The AP Buyline roundup: Prequalifying for the best personal loan

Prequalifying for a personal loan can be very useful, giving you a quick insight into which loans you can qualify for and how much you might be able to borrow. It's different from preapproval because it's just an initial estimate and won't hurt your credit score much. But taking the time to prequalify helps you understand your options better and make smarter choices. And if you do get denied, knowing why — whether it's your credit, income or debts — can help you work on improving those areas for next time.

Frequently asked questions (FAQs)

What disqualifies you from getting a personal loan?

Lenders may decline loan applications for several reasons. To qualify for a personal loan, applicants typically need to meet the following criteria:

• A good credit score and a history of consistent debt payments.
• Sufficient income to afford the payment from a personal loan.
• A modest amount of existing debt.

What credit score is needed for a personal loan?

There's no set minimum credit score for a personal loan — it varies by lender and loan type. While fair credit (FICO score 580-669) could still get you approved, lower scores make approval harder and can lead to higher interest rates. Each lender has its own criteria for personal loan approval.

Can you prequalify for a personal loan with bad credit?

It’s possible to prequalify for a personal loan with bad credit, but lenders may charge more in fees and interest for your higher-risk borrower profile. Additionally, prequalifying may be easier if you have a cosigner or provide collateral to secure the personal loan.

Does prequalified mean I'm approved?

No. Getting prequalified means the lender confirms that your basic financial circumstances are favorable for a loan. But remember, it's not the same as getting approved, which requires a detailed application and a deeper look into your financial situation.