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If you need money to pay off debt, fund home improvements or pay a sudden expense, you may be considering a personal loan.
If you are, you’re not alone. TransUnion reported that the balance of outstanding personal loans rose to $120 billion — an $18 billion increase — between 2017 and 2018. This is thanks in part to more lenders entering the personal loan space.
A bigger field of lenders is great for consumers — it means there are more lenders competing for their business. But many people aren’t taking advantage of a great tool they can use — the prequalification process — to compare options from multiple lenders. According to a U.S. News Survey, 52% of respondents didn’t use the prequalification process (also sometimes referred to as preapproval) as a tool for comparing lenders. Only 21% compared rates from three or more lenders.
If you’re considering applying for a personal loan, here’s what you should know about getting prequalified, and how you can use the process to help you find the loan option that’s best for you.
- Why get prequalified?
- Is there a difference between getting prequalified and preapproved?
- 3 steps to prequalification for a personal loan
- What should you do once you’re prequalified?
- What if you can’t get prequalified for a loan?
Why get prequalified?
There are a couple of benefits to getting prequalified. Just like when you apply for any loan, the lender will assess your financial picture to decide whether you’re a good risk to repay the loan. The prequalification process won’t guarantee approval for a loan, but it can help you understand whether you’re a strong loan applicant and — if you aren’t — how you can improve your chances of being approved.
Getting prequalified may also help you find the best loan for your situation and get you the best deal on loan terms — which could save you money. If you shop around and get prequalification from multiple lenders, you can compare options for estimated loan length, interest rates, fees and loan size.
Is there a difference between getting prequalified and preapproved?
The not-so-easy answer: sometimes.
According to the Consumer Financial Protection Bureau, there’s no significant difference in practice between these two terms — but what they mean can vary from lender to lender.
It’s a good idea to ask a lender to explain in detail what they mean by “prequalification” or “preapproval.” Learn more about the difference between prequalified and preapproved.
3 steps to prequalification for a personal loan
Getting prequalified is often a quick process, with some lenders only requiring that you answer a few questions online. The exact steps to prequalify for a personal loan will vary from lender to lender, but here’s one common way it goes.
1. You select one or more lenders. You can apply online with a bank, credit union or online lender’s website. Or you can apply in person or over the phone with a local bank or credit union.
2. You provide the lender with basic personal information, which may include your name, address, income, the amount you want to borrow and your employment details.
3. You wait for the lender to review the information you provided and perform a soft credit inquiry (though some may use a hard inquiry, so be sure to check) before deciding whether you prequalify for a loan.Hard and soft credit inquiries: What they are and why they matter
What should you do once you’re prequalified?
If you get prequalified for the loan that you want, don’t celebrate just yet. Getting prequalified doesn’t mean you’re approved for a loan — it just means you’re one step closer. Lenders will want to verify the information you provided on your application before giving you final loan approval.
Every lender has its own process, but once you’re prequalified, many will provide a more detailed look at loan options that include not only the estimated amount of the loan you’re likely to be approved for, but also other info, like monthly payment amount, the length of the loan, the interest rate and other fees that the lender may charge.
With this information from multiple lenders, you can compare your options to find the one that offers the best terms for you.
Keep in mind that the interest rate and other terms you receive from the lender are just estimates — they could change once you complete a formal loan application and they review more of your financial information.
Once you’ve chosen a lender, you’ll complete that formal application and provide documentation to verify the information you provided during the prequalification process.
What if you can’t get prequalified for a loan?
If you get denied loan prequalification, it can feel like a real blow — especially if you need money quickly. Don’t let it get to you — there are a few things you can do if a lender turns you down.
- Ask questions. Ask the lender to share with you the reasons why your prequalification was declined. With that info, you may be able to make changes that will improve your chances of qualifying for a loan in the future.
- Review your credit scores and reports. If you’re denied loan prequalification, it’s a good idea to check your credit scores and reports and start working to improve your credit.
- Consider other financing options. If you’re using a personal loan for home improvements, you may want to look into a HELOC or home equity loan. If you want to consolidate debt, consider a credit card balance transfer.
- Ask about a co-signer. If you have a friend or family member who would be willing to co-sign on a loan, you can ask the lender if this may help improve your chances of being approved.
When searching for a personal loan, getting prequalified is worth the time it takes. It can allow you to compare lenders and loan terms to find your best option — and that can potentially save you some money. If a lender won’t prequalify you, find out why so you can make some changes that can increase your chances of getting prequalified in the future.