How to Successfully Prequalify for a Personal Loan in 2023

Getting a personal loan can be an effective way to finance a large purchase or consolidate high-interest debt. However, the process of applying for a personal loan can seem daunting, especially if you are worried about getting rejected and having your credit score negatively impacted. This is where prequalification comes in handy!

Prequalifying for a personal loan allows you to check your eligibility and preview loan terms from lenders without a hard credit check. It helps set realistic expectations about the loan amounts, interest rates, and fees you can qualify for based on your credit profile and income

In this comprehensive guide, we will walk you through the step-by-step process to prequalify for a personal loan successfully.

What is Loan Prequalification?

Prequalification refers to the initial stage of the loan application process where the lender makes a soft credit check and asks you for basic information about your finances to determine the loan terms you may qualify for.

It is different from preapproval, where the lender actually verifies your income, assets, credit reports, and other documents before issuing a preapproval letter. Prequalification is thus, more informal and doesn’t guarantee loan approval.

Benefits of Prequalifying for a Personal Loan

Here are some of the biggest benefits of prequalifying for a personal loan

• Get an idea of the loan amount, interest rates, and fees you can expect without a hard inquiry on your credit report.

• Identify the lenders most likely to approve your application before formally applying.

• Evaluate if taking out a personal loan makes sense for your financial situation.

• Compare loan terms from multiple lenders to find the best offers.

• Prepare necessary documents like bank statements, tax returns, etc. in advance.

• Avoid getting rejected after a hard credit check which can negatively impact your score.

How Does the Prequalification Process Work?

Prequalifying for a personal loan is quite simple and takes just a few minutes. Here are the typical steps:

1. Select lenders: Select a few lenders that offer personal loans and have prequalification forms on their website. Make sure to include lenders that cater to your specific credit score range.

2. Fill application: Complete the prequalification application form with details like your income, employment, monthly expenses, loan purpose, amount required, etc.

3. Consent for soft pull: Give consent for the lender to run a soft credit check to access your credit report. This will not impact your credit score.

4. Review offers: The lender will use your information and credit data to determine the loan amount and terms you may qualify for. Review these tentative offers.

5. Compare options: Repeat the process with multiple lenders to compare interest rates and find the best loan offers tailored to your profile.

6. Proceed with application: Finally, select the best lender and proceed with formally applying for the personal loan.

Factors Considered for Prequalification

Lenders generally consider the following factors when determining the personal loan terms to prequalify borrowers for:

• Credit score: The higher your credit score, the better the interest rate and loan amount you’ll be offered. Borrowers with scores above 720 get the best rates.

• Income: Your total monthly income from all sources is verified to determine the repayment capacity. Stable and higher income increases chances of getting approved.

• Existing debts: Your total monthly debt obligations are checked to calculate the debt-to-income ratio. The lower your existing debts, the better.

• Loan amount requested: Loan amount requested is checked based on your income, credit score, and current debts.

• Other factors: Some lenders also consider your employment history, assets, savings, payment history, etc.

Minimum Requirements to Prequalify

Though prequalification criteria can vary across lenders, there are some basic requirements you must meet:

• Be a U.S. citizen or permanent resident above the age of 18.

• Have a valid Social Security Number.

• Have an active checking account.

• Show proof of identity and residential address.

• Have a minimum credit score between 580-650. The specific threshold depends on the lender.

• Meet the minimum income requirement, usually $1200-$2000 per month.

Meeting these prerequisites is essential for the lender to even consider your application for prequalification.

How to Improve Your Chances of Prequalifying

Here are some tips to improve your odds of successfully prequalifying for a personal loan:

• Maintain a credit score above 670. Take steps to boost your credit score if needed.

• Lower your debt-to-income ratio by paying down debts. Keep credit card balances low.

• Avoid applying for multiple new credits before applying for a loan. Too many hard inquiries can hurt your score.

• Build your credit mix by having different types of active accounts such as credit cards, auto loans, mortgages, etc.

• Increase your income with a side gig or new job if your current income seems inadequate.

• Provide all supporting documents upfront to demonstrate your ability to repay the loan.

• Consider adding a creditworthy cosigner to strengthen your application, if you have poor credit.

How Prequalification Affects Your Credit Score

The best part about prequalifying for a personal loan is that it allows you to check loan offers without impacting your credit score.

This is because prequalification only involves a soft credit check, also known as a soft pull or soft inquiry. Soft credit checks do not appear on your credit report and do not affect your credit score.

On the other hand, formally applying triggers a hard credit check which can negatively impact your score by a few points. Too many hard inquiries can also deny loan approval. Avoiding multiple hard pulls is thus key.

However, prequalification is not a guarantee of loan approval. You will still have to formally apply, submit documents, and undergo hard credit check to get approved and receive the loan.

Can You Get Approved After Prequalification?

Prequalification does not guarantee you will get approved and receive the same loan terms after formally applying.

However, if your financial situation has not changed much after prequalification, your chances of getting approved are quite high if you:

• Verified all information provided for prequalification is accurate.

• Submit all required documents validating income, employment, liabilities, etc.

• Your credit score has not decreased significantly after prequalification.

• Provide clarification or additional details if requested by the lender during underwriting.

• Accept the final loan terms and conditions upon approval.

Unless you notice a significant change in the loan terms during final underwriting, you can accept the loan offer and proceed with getting funded after the final approval.

Prequalification vs Preapproval: What is the Difference?

While the two terms are sometimes used interchangeably, there are distinct differences between prequalification and preapproval:

Prequalification

• Soft credit check

• Minimal documentation

• Gives estimated loan amount and terms

• Doesn’t require extensive verification

• Faster process

• Doesn’t guarantee approval

Preapproval

• Hard credit check required

• Detailed documentation of income and assets

• Provides guaranteed loan offer after verification

• Lender agrees to lend if conditions met

• Slower and stringent process

• High chances of loan approval

Steps to Prequalify for a Personal Loan

Follow these simple steps to prequalify and get personalized loan offers tailored to your financial profile:

1. Check your credit score

Check your current credit score using a free site like Credit Karma or your bank’s online portal. This gives an idea of what terms you’ll likely qualify for.

Taking steps to improve your score before applying can get you better loan offers.

2. Research suitable lenders

Make a list of top lenders that offer personal loans for your specific credit score range. Comparison sites can help find the best lenders.

3. Determine loan amount needed

Decide the loan amount you need based on your requirement. Only apply for what you require to avoid getting overburdened.

4. Gather required documents

Keep information related to your income, employment, expenses, debts, and assets handy. This will be required to fill the forms.

5. Fill out online prequalification forms

Go to the lender’s website and fill out the prequalification form with all requested details. Get prequalified with multiple lenders.

6. Submit minimum documents

You may have to submit scanned copies of your ID proof, income evidence, and bank statements during prequalification.

7. Review tentative offers

Review the personalized loan amounts, interest rates, and terms offered to you by different lenders.

8. Compare options and pick the best

Compare the tentative offers side-by-side and select the lender providing the most favorable loan terms based on your needs.

9. Proceed with formal application

Finally, apply formally with your chosen lender to get approved and set up your loan!

Documents Required for Personal Loan Pre