For many consumers, personal loans can be a flexible way to finance a major purchase or cover an emergency expense. Rather than burdening your credit card or pursuing other high-interest loan options, a personal loan can accommodate your needs as long as you secure a favorable interest rate and examine the terms and conditions.
Learn about the role pre-qualifying plays in the borrowing process and what benefits you can enjoy when you pre-qualify for a personal loan.
What Is a Personal Loan?
A personal loan is a type of loan that you can use for various purposes, from consolidating debt to financing a home improvement project. Personal loans are typically unsecured, which means they are not backed by collateral like a car or home. As a result, personal loans tend to have higher interest rates than secured loans.
Consumers can obtain personal loans from banks, credit unions, and online lenders. Your prospective creditor will ask for personal information such as your name, address, date of birth, phone number, and social security number when checking your eligibility for a personal loan.
The terms of a personal loan will vary depending on the lender, but they typically range from two to five years, often expressed in month-long terms. Before taking out a personal loan, it is important to compare loan offers from multiple lenders to find the best rate and terms.
What Does it Mean to Pre-Qualify for a Personal Loan?
Pre-qualifying is one of the most critical steps when considering a personal loan. Pre-qualification refers to the process of applying for a loan before you need the funds. This process allows lenders to check your credit history with a soft credit pull without affecting your credit score.
When you pre-qualify, you know what loan terms, loan amount, and interest rates you can expect if you go through with taking out a loan. Pre-qualifying also gives you a chance to comparison shop, saving you money in the long run.
What Are the Benefits of Pre-Qualifying for a Personal Loan?
By pre-qualifying for a loan, you can know what interest rate a lender may offer and what monthly payment to expect. This information can help you determine whether or not you can afford the loan and provide some negotiating power when it comes to securing the best possible terms.
Additionally, pre-qualifying for a loan can help speed up borrowing. Your lender will already have much of the required information before you formally apply, reducing the number of documents you need to supply and processing time.
How Do You Pre-Qualify for a Personal Loan?
When you apply for pre-qualification for a personal loan, the lender will run a soft credit check and ask to know your income.
A soft credit check, also known as a soft credit pull, is a type of credit inquiry that does not affect an individual’s credit score. Besides lenders, soft credit checks may also be used by employers when considering a job applicant or by landlords when considering a tenant.
Soft credit checks typically only include information already visible on an individual’s credit report, such as their name, address, and date of birth. As a result, soft credit checks have little impact on your credit score overall. In some cases, you may see up to a 5-point subtraction from your FICO score; however, this decrease is likely temporary.
Your lender will also ask about your employment situation and other factors affecting your ability to repay the loan, such as mortgage or rent payments, tax obligations, or annual income.
Based on this information, the lender will give you a general idea of what interest rate you could qualify for and how much money you could borrow. Remember that pre-qualifying for a loan doesn’t guarantee you’ll get approved for the funds. It’s simply a way to get an estimate of what terms you might qualify for.
What Factors Influence a Lender’s Decision When Pre-Qualifying Consumers?
Lenders consider several factors when pre-qualifying a consumer for a personal loan. One of the most important considerations is the borrower’s credit history. A strong credit score indicates that the borrower is likely to repay the loan in a timely fashion, while bad credit may indicate that the borrower is a higher risk.
Generally, lenders consider credit scores between 580 and 670 fair, under 579 poor, and above 740 good or excellent.
Another critical factor is the borrower’s income and employment history. Lenders want to see that you have a steady source of income and a history of responsible financial management.
Finally, lenders will consider the borrower’s debt-to-income ratio (DTI). This ratio measures how much of the borrower’s annual income is used to make payments on existing debts. A high debt-to-income ratio may signify that the borrower is already overextended, making it less likely that they can repay the loan.
There’s no hard and fast rule about what qualifies as a good DTI ratio, but most experts recommend keeping it below 36%. That means that for every $100 of income you bring in, no more than $36 should go towards debt payments.
How to Increase Your Chances of Personal Loan Approval When Applying
Applying for a personal loan can be stressful, especially if you’re unsure whether you’ll be approved. However, you can do a few things to increase your approval chances.
Make sure you meet the lender’s minimum requirements. Each lender has different criteria, but most will require that you have a steady income and a good credit history.
Try applying for a loan amount within your borrowing capacity. Lenders typically only approve loans they feel confident consumers will be able to repay. If you need a loan with a higher amount, consider asking a friend or family member with good credit to co-sign with you for the funds.
Be prepared to provide additional documentation with your loan application if requested. Documents could include bank statements or tax returns, so have your most recent documents ready to prevent delays.
Pre-qualify for a Personal Loan Today
A personal loan can be a great way to cover unexpected expenses, consolidate debt or make a large purchase. By pre-qualifying for a personal loan, you can ensure a more straightforward application process and understand the interest rate and terms you qualify for at your financial institution.
The process of pre-qualification is simple and takes only a few minutes online. Approval for a personal loan can be challenging, but following a few actionable tips and taking the time to pre-qualify can increase your chances of being approved and getting the money you need quickly.
Finance is us is an online resource that assists consumers in making the best financial decisions. Whether evaluating an auto loan or opening a savings account, Finance is us has the information you need to make the most informed choices.
Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.