Prequalification: Step 1 for finding a loan with bad credit

Pensive woman wondering about prequalification and whether she can get a loan with bad credit, she's sitting at desk in the living room looking at laptop Image: Pensive woman wondering about prequalification and whether she can get a loan with bad credit, she's sitting at desk in the living room looking at laptop

In a Nutshell

No one applies for a loan with bad credit for the fun of it. If you’re looking for a personal loan, you probably really need the money, so getting turned down can be a big problem. Prequalification is a simple process that helps you find out if you have a good chance of getting the loan you need.

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Finding a loan with bad credit can be a lifeline if you don’t have emergency funds and are facing an unforeseen expense or you’re struggling with high-interest debt.

Poor credit can make it difficult to get any kind of loan, let alone one with an interest rate and loan terms you can afford. What can you do to better understand your chances of getting approved for a loan you need?

While applying to prequalify for a personal loan with bad credit doesn’t increase your approval odds, it can give you an idea of whether you’ll get approved before you complete a formal application. Prequalifying also may help you estimate how much you might be able to borrow and what your interest rate and monthly payments could be.

Another plus: The prequalification application process typically doesn’t affect your credit scores. Here is some insight into how the process works, along with tips to help you evaluate any loan offers.



Can I prequalify for a personal loan with bad credit?

Financial institutions like banks and credit unions, as well as online lenders, offer personal loans. Most lenders will check your credit when considering you for a loan, and if you have poor credit, they’ll know when they pull your credit scores and reports.

Bad credit doesn’t necessarily mean you can’t get a personal loan or other type of installment loan. But higher credit scores can make it easier to qualify — and prequalify — for a loan with lower interest rates. Credit scores typically range from 300 to 850 points, and people with higher credit scores usually get better interest rates.

But bad credit could mean not being approved, or getting approved for a personal loan with a high interest rate, which will cost you more in interest over the life of the loan.

Still, a personal loan with bad credit will almost certainly be less expensive than some short-term borrowing options, like payday loans. Just make sure you’re shopping around to find the best possible rate available to you.

Should I get a personal loan?

How is prequalification different from approval?

When a lender approves you for any kind of credit, including a personal loan, it’s offering to loan you a certain amount of money at specific terms, which usually includes an interest rate and agreed-upon repayment schedule. Your loan application typically gives the lender permission to access and review your credit reports and scores to help it determine if you qualify.

That review often involves a hard credit check, or hard inquiry, on your credit reports, which may lower your credit scores by a few points.

Prequalifying for a personal loan lets you get a preview of whether you might be approved for a loan before you actually apply, and at what potential rate and terms. By prequalifying, you can see whether applying is worth your time.

Prequalification usually results in a soft credit check, or soft inquiry, on your credit reports. While a soft inquiry may show up on your credit reports, it won’t affect your scores.

Being prequalified doesn’t guarantee you’ll get approved for a loan, or even get approved at the terms you preview, but it may give you a better idea of your odds.

What is the process to prequalify?

Each lender will have its own prequalification process for personal loans. Here are some common steps.

  • Step 1: Complete a prequalification request. The request usually includes your name and some basic personal information about your income and financial situation, as well as how much you want to borrow and what you plan to use the money for.
  • Step 2: The lender reviews your request. The lender will check your credit history to see how you’ve handled credit in the past. Make sure the lender is doing a soft credit check, or “soft pull,” which won’t affect your credit scores.
  • Step 3: If you prequalify, the lender gives you a preliminary offer. That may include an estimated interest rate, annual percentage rate, loan amount and estimated monthly payment. You’ll also want to check if the lender charges origination fees or prepayment penalties.

If you request prequalification online, you may get a response within a few minutes. Keep in mind that this offer isn’t a loan approval, so the rate and terms could change.

If you do prequalify for the loan you want, the next step is to complete a formal application and give the lender additional information, such as your bank statements and recent tax returns. The lender uses this documentation to verify the information you submitted during the prequalification process and make a final decision on whether to give you the loan, which results in a hard credit inquiry.

Your loan can be denied even if you were prequalified and received a preliminary offer. If that happens, you’ll receive a notification known as an adverse action notice. This notification should explain why your loan wasn’t approved, or notify you of your right to receive a statement of the reason you weren’t approved, and how you can get free copies of your credit reports from the credit-reporting agencies that issued the reports.

How can I improve my chances of prequalifying?

Your credit scores and history can play a big role in any credit approval process, whether you’re applying for a personal loan, a credit card or a mortgage. That’s because lenders view credit scores and reports as an indication of how well you might do with repaying new credit.

Taking steps to improve your credit can help the loan prequalification process go more smoothly. Steps that can help build your credit include …

  • Paying all your bills on time, every time.
  • Paying down debt. Maybe you need a personal loan to refinance high-interest credit card debt. One strategy is to pay off the smallest debt first, and then work on larger debts.
  • Avoiding new credit unless you really need it. Remember, you’re working toward improving your credit to secure a personal loan.
  • When paying off a credit card, consider not closing the account, especially if it’s a card you’ve had for a while. Length of credit history and credit utilization ratio are both credit-scoring factors that closing a card can adversely affect.

What’s next?

Living with bad credit can be challenging, but educating yourself about your loan options and making smart credit decisions can set you on a path toward better credit.

A personal loan could even help your credit scores improve if you make all your payments in full and on time.

Before you try to prequalify for a loan with bad credit, review your spending habits and take steps to build your credit. Once you’re ready, see if a bad credit loan is an option that makes sense for you.


About the author: Marcie Geffner is an award-winning freelance reporter, editor, writer and book critic. Her work has been featured online and in print by the Chicago Sun-Times, Fox Business Network Onlin… Read more.