How to Prequalify for a Personal Loan

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“Prequalification for a personal loan means the lender has reviewed basic financial information, such as income and creditworthiness, to see if you’re likely to qualify,” says Kyle Enright, president of lending at Achieve, an online lender. “If you prequalify, the lender will provide an estimated loan amount and annual percentage rate.”

How is this a benefit? Prequalifying allows you to compare possible rates and terms with a soft credit check that doesn’t ding your credit. This stage is different from the approval process, which involves submitting a formal application that requires a hard credit check that temporarily lowers your credit score.

Because there is not much to lose from prequalifying, it is an excellent first step to finding the loan that best matches your unique needs and budget.

How to get a personal loan: 7 Steps and expert tips

Want to know what you should do after getting prequalified for a personal loan? Here’s a step-by-step explanation for the process.

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6 Ways to increase your chances of getting prequalified for a personal loan

1. Review your credit report: Before prequalifying with a lender, review your credit reports and dispute errors that could be dragging your score down. You can order a free weekly credit report from all three credit bureaus – Equifax, Experian and TransUnion – by going to AnnualCreditReport.com.
2. Improve your credit score: Pay all your bills on time, keep credit card balances low and avoid applying for new credit.
3. Consider a cosigner or joint applicant: If you have a lower credit score, a cosigner or co-borrower with a higher credit score may help you prequalify for a personal loan.
4. Get a secured personal loan: Unlike an unsecured personal loan, a secured personal loan requires you to attach collateral, such as a bank account or vehicle, to qualify. Because these loans are less risky for the lender, you may have an easier time prequalifying.
5. Reduce debt-to-income (DTI): Another way to increase your approval odds is to pay down debt to lower your DTI, which measures how much of your gross monthly income goes toward paying debt. The lower your DTI, the better your chances of prequalifying.
6. Try prequalifying with other lenders: Just because one lender rejects your prequalification doesn’t mean others will. Shop around for other lenders that have eligibility requirements that match your financial situation and credit profile.

According to Enright, it is best to be strategic and mindful of how much you’re spending, especially when it comes to credit cards, and to aim for the ultimate goal of making sure you can pay off every bill in your repertoire on time and in full.

5 Steps to prequalify for a personal loan

Take the following steps when prequalifying for a personal loan for a smooth and successful application process.

Step 1: Check your credit score

Check your credit score before applying to know which lenders are most likely to approve you. Applicants with credit scores of 740 or higher are more likely to get the best rates and terms associated with excellent credit personal loans. You may also secure a competitive rate if your FICO score sits between 670 and 739 with a good credit personal loan.

That said, those with lower credit scores still have options since there are lenders that cater to borrowers with bad credit and fair credit. If your credit score seems to be the primary reason you don’t qualify, take steps to improve your score before reapplying.

Best bad credit loans

Looking for a personal loan but have a credit score that’s less than ideal? Not to fear – Bankrate has you covered. Check out these lenders and their rates.

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Step 2: Determine your budget

To see how much personal loan you can afford, review your budget. If you don’t have one, create a monthly budget. Afterward, subtract your expenses from your income to see how much discretionary income you have.

“Sit down with a budget sheet and see what money you have left over at the end of the month,” says Domenick D’Andrea, certified plan fiduciary advisor and co-founder of DanDarah Wealth Management. “Once you have this number, I would suggest that you try to stay at no higher than 50% of this discretionary number so you still have funds for emergencies.”

Step 3: Research lenders

Loan amounts, rates, terms, fees and eligibility requirements vary depending on the lender you work with. To find the loan that’s right for you, research as many personal loan companies as possible. You can research lenders and view potential rates using websites like Bankrate.

Alternatively, you can visit each lender’s website and go through the prequalification process. Comparing rates from several companies can help you determine which lenders are most likely to approve your prequalification application.

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Want to get a personal loan? Research and compare some of Bankrate’s top-rated personal loan lenders.

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Step 4: Fill out a prequalification form

You must provide the lender with your financial information to receive a loan offer. Prequalification forms differ by lender but typically require a few key pieces of information.

• Income
• Current amount of outstanding debt
• Desired loan amount
• Desired loan term
• Credit score range
• Reason for borrowing

When you submit the form, a lender will perform a soft credit check to review your credit history.

Step 5: Check prequalified offers and compare

When you prequalify for a personal loan, a lender will send you a loan offer that includes your rate, how much you can borrow and repayment terms to select. Keep in mind these terms aren’t finalized until after a lender officially approves your loan.

“How much of a loan you could potentially qualify for is important, as is the interest rate. The APR may be more helpful as it incorporates fees, such as loan origination fees,” says Enright. “Look carefully at the terms, due dates and whether there are late fees or prepayment fees.”

• APR: Your APR includes interest and any fees the lender charges.
• Repayment terms: How long you have to repay the loan impacts your borrowing cost. Selecting a longer term can lower your monthly payment, but it also means paying more interest over the life of the loan.
• Total borrowing costs: Once you know the APR and repayment terms, plug them into a personal loan calculator to calculate your monthly payment and total interest costs.
• Fees: You’ll also want to take a close look at the fees a lender charges, including origination fees and late fees.

Once you’ve shopped around and chosen the best deal for you, submit a full personal loan application. While personal loan documentation requirements vary, you might have to provide your most recent tax returns and pay stubs, a recent bill to confirm your address and a copy of your driver’s license.

What to do if you don’t prequalify for a personal loan

If your application is denied, there are several things you can do to find out why:

1. Review adverse action notice: If a lender denies your prequalification application, it must send you an adverse action notice explaining why. Review this document carefully.
2. Reach out to the lender: Contact the lender to find out what happened if it doesn’t send you an adverse action notice.
3. Strengthen your credit file: The adverse notice should include the credit score the lender used for making its decision and what you may need to work on. If that’s the case, focus on improving your credit before prequalifying again.
4. Pay down debt: If the reason was because your DTI was high, focus on paying down debt.