How to Pre-Qualify for Personal Loans and Get Free Rate Quotes
If you’re thinking about getting a personal loan, one of the first steps is to get pre-qualified.
A personal loan is a type of installment loan that you’ll pay back over several months or years.
These loans are flexible in nature, so you can use them for many purposes like debt consolidation, home improvements, a vacation, etc.
As a form of credit, though, applying for a personal loan doesn’t guarantee approval.
To no surprise:
Lenders must first assess whether you’re an ideal candidate, which typically involves evaluating multiple factors.
If you’re approved, you can typically get funds within a week. And oftentimes, the interest rate on a personal loan is lower than the rate on a credit card.
- What does pre-qualification involve?
- And most importantly, what does it mean to be pre-qualified for a personal loan?
The Pre-Qualification Process for a Personal Loan
When some people get a personal loan, they submit an official application with a lender and skip the pre-qualification process.
This certainly is an option since there’s no rule that says you must get pre-qualified before applying.
Pre-qualification, however, is a crucial step.
You’ll learn whether you meet the minimum requirements for a personal loan.
It also provides information on estimated loan terms.
Whether you’re getting a personal loan through a big bank, a credit union, a community bank, or an online lender, most financial institutions have a pre-qualification form on their website for you to complete.
This is a basic form that starts the process.
1. Provide personal and financial details
You’ll enter key personal information such as your name, address, and income. You’ll also provide your Social Security number.
Once you provide this information and send it off, the lender performs a soft pull on your credit.
Also known as a soft inquiry, this is when a lender checks your credit and decides whether you’re likely to be approved for a loan.
The information you enter on the form isn’t verified. And since the lender isn’t using your credit to make a lending decision (at this point in time), a soft inquiry doesn’t impact your credit score.
2. Get a rate quote
Again, the purpose of getting pre-qualified is to know what rate and terms you can expect.
If you get pre-qualified for a personal loan and the lender offers a favorable rate, you might choose to proceed with the loan.
But if you’re not eligible for a favorable rate—meaning you’ll pay more for the loan—you can postpone getting a personal loan at this time.
3. Submit an official application
As mentioned, pre-qualification is only a preliminary step.
If you’re pre-qualified for a loan and choose to proceed, the next step is to submit an official personal loan application.
You’ll provide much of the same information that you provided on the pre-qualification form.
The main difference:
The lender will now verify this information.
You’ll submit proof of employment and income, and the lender takes a much closer look at your credit report. This is considered a hard credit inquiry because the lender “now” uses your credit as part of the decision making process.
What Does It Mean to Be Pre-qualified?
To be clear:
A pre-qualification does not guarantee that you’ll be approved for a personal loan.
It only indicates that you’re likely to be approved, and it provides a snapshot of loan terms the lender might offer.
Once the bank receives your official loan application, your loan officer will request supporting documentation to confirm the accuracy of information.
Lenders will take a closer look
They might contact your place of employment to verify income, or you might have to provide recent W-2s, bank statements, and tax returns from the previous two years.
As the lender takes a closer look at your credit report, they’ll also evaluate your current debt load.
A personal loan creates a new debt and a new monthly payment.
And unfortunately, if you have too much existing debt, the bank might conclude that you’re overextended and deny your loan application.
How to Evaluate Your Personal Loan Offer
Your personal loan offer contains key information about the loan.
It’s important that you closely evaluate these details to ensure a good deal. Loan terms to consider include:
1. Interest rate
Your credit history plays a big role in your personal loan rate.
Typically, the higher your score, the lower your rate.
Therefore, a good credit score helps you save money over the life of the loan.
Personal loan rates vary according to market conditions. They also vary from bank to bank, so it’s important to shop around and get multiple rate quotes from different lenders.
2. Loan amount
Even if you request a certain amount, the lender determines your maximum loan amount based on your income and current debt load.
When reviewing your offers, consider whether the loan amount is enough for the desired purpose. If you have too much debt, you might qualify for less money.
In this situation, you can postpone getting the loan until after you’ve paid off other debt. In which case, you might then qualify for a larger loan.
Keep in mind, too, the lender could approve an amount that’s more than you actually need. It’s tempting to accept a bigger loan, yet it’s smarter to only borrow what you need.
3. Estimated monthly payment
You’ll repay a personal loan over a period of several months or years. As you compare your loan offers, make sure the estimated monthly payment fits within your budget.
In other words:
Can you reasonably afford this amount on a monthly basis?
If you question your ability to afford a particular monthly payment, talk with your lender.
Loan terms vary, and extending the term by an extra six or 12 months might create a more affordable payment. Just know that the longer the loan term, the more you’ll pay in interest.
4. Loan fees
Be mindful, too, that some personal loans have fees attached to them.
These also vary by lender, but a typical fee might include a loan origination fee.
Common Personal Loan Fees
|Type of fee||Typical cost|
|Application fee||$25 to $50|
|Origination fee||1% to 6% of the loan amount|
|Prepayment penalty||2% to 5% of the loan amount|
|Late payment fee||$25 to $50 or 3% to 5% of monthly payment|
|Returned check fee||$20 to $50|
|Payment protection insurance||1% of the loan amount|
Some lenders will also add a pre-payment penalty to the loan.
Banks make their money by charging interest, so some financial institutions charge a penalty when a borrower pays off their balance early.
Increase Your Chances of an Approval and Better Rates
Since lenders take various factors into consideration when reviewing loan applications, not everyone who applies for a personal loan gets approved.
The good news:
You can take steps to increase your odds of approval.
If you’re not in a rush and have some time before applying—perhaps a month or more—here’s what you can do to get approved and find better rates.
1. Check your credit report
Credit report errors can reduce your credit score. This can make it harder to get approved for a personal loan, and if approved, it can result in a higher interest rate.
Order copies of your credit reports first, and then examine them for accuracy. You can get copies of your reports from Annualcreditreport.com.
Once you have your reports, closely evaluate them and dispute any errors.
2. Take steps to improve your credit score
Take other steps to improve your credit, too.
Payment history makes up 35 percent of your credit score. So it’s important to pay your bills on time every month.
In addition, the amount you owe makes up 30 percent of your credit score. If you have high credit card balances, come up with a plan to eliminate or pay down these balances.
Keeping credit card balances below 30 percent of your credit line can improve your score.
3. Lower your debt-to-income (DTI) ratio
Your debt-to-income ratio refers to the percentage of your monthly gross income that goes toward debt repayment.
Lenders typically prefer a debt-to-income ratio below 36 percent, although some will approve borrowers with ratios as high as 50 percent.
To calculate your debt-to-income ratio:
- add up your minimum monthly debt payments (credit cards, auto loan, mortgage, student loan, etc.), and then
- divide this number by your monthly gross income.
If your ratio is higher than 43 percent, postpone applying for a personal loan until after you’ve paid off some of your debt.
A personal loan comes in handy for projects around the house, debt consolidation, and even a vacation. But not everyone who applies gets approved, and sometimes, those approved receive less than favorable terms.
Pre-qualification is a preliminary step that can eliminate surprises after submitting a loan application.
You’ll learn whether you’re likely to get a loan and the terms you can expect.
This is great for rate shopping, as it allows you to compare loan offers from different institutions and get the best deal.