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Like any line of credit, there are certain requirements for personal loans when it comes to your credit and financial standing. That means your prospective lender(s) will need to pull a hard credit check while you’re applying for personal loans, which does have an impact on your credit score.Enter personal loan preapproval: a soft credit check process that allows you to learn more about whether you qualify for a loan without potentially pushing your score lower in the process. Also sometimes referred to as personal loan prequalification, it allows you to check out interest rates and loan terms from a variety of potential lenders before committing.So how does preapproval work, and what should you do if you’re having trouble prequalifying? Let’s take a closer look at this part of the personal loan application process.What Is Personal Loan Preapproval or Prequalification?
Personal loan preapproval, sometimes called prequalification, is a process where lenders use a soft credit check to see whether or not you’re likely to qualify for a personal loan, and if so, offer an estimate of loan rates and terms that might be available to you.As mentioned above, prequalification doesn’t impact your credit score the way a hard credit check does, which is done when formally applying for personal loans. This makes prequalification a good option for those who are considering a personal loan, but aren’t sure their credit history will support their application and meet the requirements for personal loans. Getting preapproved — or not getting preapproved — will give you more information about where you stand as a potential borrower.Prequalification vs. Preapproval
While prequalification and preapproval mean pretty different things when it comes to a mortgage, in the world of personal loans, they’re often used interchangeably. That said, every lender is different, so if you’re not sure what a financial institution means by personal loan prequalification or preapproval, check with them directly. If anything, prequalification tends to be less involved than preapproval, but also less reliable and comprehensive. For instance, you may get a yes or no answer with prequalification, but no suggested rates, or a broad spectrum of prospective rates that doesn’t give you much specific information.How Does Personal Loan Preapproval Work?
The process of preapproval is pretty simple: you’ll provide some basic personal information, like your name, date of birth and address, as well as financial details like whether you rent or own your home, how much you pay each month for housing and your monthly income. Your lender might also ask for your Social Security number, which will make it easier to pull a hard credit check if you decide to move forward with your application, but during prequalification, a hard credit check won’t be run.Once you’re preapproved, your lender will offer an estimate of your available loan rates and terms based on the amount you’re hoping to borrow and your financial status. While these estimates are just that — estimates, which can change — this information can help you understand what kind of rates you’re qualifying for (let alone if you qualify at all). Why To Get Your Personal Loan Preapproved If You Can
While there are many benefits of personal loans and good reasons to consider them, taking out a personal loan still involves going into debt; that’s just how personal loans function. Prequalification can show you whether or not you’ll qualify for the loan without potentially hurting your credit score, for starters — which is a good thing since a lower credit score generally means higher interest rates, and in turn more money paid to the lender over time.Additionally, prequalifying gives you the opportunity to check your estimated rates from a variety of different lenders before you decide who to borrow from — which is to say, it gives you the chance to shop around.And if you find out your rates are too high for comfort or that you don’t prequalify, you’ll have the opportunity to work on your credit score and other financial markers before you go through with the formal loan application process, all without your credit score taking a hit.The Prequalification Process: 3 Steps
So what does the step-by-step preapproval process look like? It really is simple, we promise. Here’s what you can expect.1. Choose a Lender (or Three)
One of the coolest parts about preapproval is that you don’t just have to stick to one lender. Shop around and compare personal loan interest rates by getting you preapproved with a number of different lenders at once, which gives you the power and leverage to see what deals are available. You may compare rates offered by banks, credit unions, and nonbank private lenders.2. Provide the Required Information
These days, you can usually get preapproved online in just a few minutes for quick personal loans. Simply follow the prompts on the website, providing your name, birthday, financial and contact information. You’ll probably also need to estimate how much you want to borrow.3. Receive Your Preapproval
Usually, you’ll get your preapproval notification in just a few seconds. Rate estimates may be delivered to your email inbox, if you provided an email address, or they may simply populate in the browser tab in which you applied. Either way, if any of these deals looks good to you, you’ll need to continue on and go through the formal process of applying for personal loans — which does involve a hard credit pull — to secure those rates and actually get the loan money disbursed to you.What To Do If You Get Preapproved
Once you’re preapproved, you can decide whether or not the estimated loans available to you will fit within your budget, or whether it might make more sense to wait until you’re able to qualify for a lower interest rate or monthly payment. Getting preapproved for a large personal loan does not mean you need to pursue it.If you do decide to move forward after reviewing your offers, you will choose a lender and then complete the formal loan application process. After that, you’ll get notified of your approved personal loan application status and can then accept the loan and sign the paperwork. Your funds will arrive soon after that, usually within a few days at the most.Recommended: Applying for a Personal Loan Online vs In-PersonWhat If You Can't Get Prequalified?
If you can’t get prequalified, take a deep breath — at least you found out without dragging your credit score even lower. You can only go up from here.If you really need the money fast, you might be able to add a cosigner to your personal loan application, which could give you more leverage to qualify. Be sure to check your free credit report, too, to see if any of the information is in error.But in most cases, the best thing to do if you’ve been denied a loan on the basis of your credit history is to try to create a brighter credit future by working to improve your score. Repairing your credit score and paying off some existing debt will take time and dedication, but it is possible — and doing so can help you qualify for a personal loan in the future. Start by making at least the minimum payment on each of your existing debts each month, and make those payments on time.If you have a mountain of debt to reckon with, many people will choose a specific account on which to focus their efforts and any extra money they have available. For example, you might choose the credit card with the highest interest rate and work hard on getting that paid down first, or choose the existing loan with the lowest account balance. (These are known as the “avalanche” and “snowball” methods of debt repayment, respectively.)The Takeaway
As you can see, there are a number of benefits to preapproval. Essentially, prequalifying or getting preapproved for a personal loan gives you the flexibility to shop around without hurting your credit score.Lantern by SoFi makes it easy to compare personal loans interest rates by getting you preapproved with a variety of lenders — it just takes a few minutes.
Photo credit: iStock/Rossella De Berti
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About the Author
Jamie Cattanach
Jamie Cattanach is a full-time freelance writer whose work has been featured at CNBC, Yahoo Finance, The Motley Fool, the Huffington Post and other outlets. At SoFi, she writes about investing, retirement, student loans and how to get your money right -- no matter what that means for you.
