How Personal Loan Pre-Approval Works
by Matt Frankel, CFP | July 19, 2019
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The personal loan pre-approval and application process can be confusing. This will clear it up.
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The personal lending industry has exploded in size in recent years. There are dozens of reputable companies who want to loan you money. And the pre-approval process for personal loans is far more streamlined than it used to be.
Here’s what you need to know about the personal loan pre-approval process before you apply. We’ll look at the key differences between personal loan pre-approvals and personal loan applications. Then we’ll talk about what to expect after you’ve passed the pre-approval process.
We’ll also cover some tips to help you navigate the process and choose the best personal loan for you.
What is a personal loan pre-approval?
A personal loan pre-approval is a process in which you check your eligibility for a personal loan with a specific lender. A pre-approval tells you whether you qualify for a loan with that lender. It also tells you what interest rates, fees, and loan terms you could get.
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Generally, a personal loan pre-approval requires information about your income and employment. You also need to submit to a credit check (more on that in the next section).
To be clear, a pre-approval isn’t a binding offer. The pre-approval is based on the information in your credit report and other information you provide. The personal loan application involves more documentation.
For example, your pre-approval might be based on a certain amount of income. What happens if your lender is unable to verify your income? You could be rejected for the loan -- even though you passed the pre-approval process.
Will a personal loan pre-approval affect your credit score?
Generally speaking, no. Most personal lenders allow applicants to check their interest rates and loan terms with no effect on their credit score.
These lenders conduct what’s known as a soft credit pull. Think of this as an “unofficial” credit check. The lender views your credit score and credit report without an official credit inquiry (also known as a hard credit pull).
Although most personal lenders let you check your rates without a hard credit pull, not all of them do. Are you worried that a particular lender’s rate-checking process could result in a hard credit pull and adversely affect your credit score? Look for an indication on the pre-approval page that checking your rates won’t affect your credit score or something similar.
How to get pre-approved for a personal loan
The first step in getting pre-approved for a personal loan is to make a list of the lenders whose products meet your needs. Most personal lenders allow you to check your loan offers without affecting your credit score. So it’s in your best interest to check your rates and terms with at least a few personal lenders.
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Start with our list of the best personal lenders and go through this checklist with each lender to make your shortlist:
- Check the lender’s loan amounts. If you need to borrow $40,000 but the lender only makes personal loans up to $30,000, there’s no sense in pursuing a pre-approval with that lender.
- Check the lender’s credit standards. Some lenders welcome borrowers with so-so or even bad credit histories, while others only make loans to borrowers with top-notch credit.
- Check the lender’s term lengths. If you want to stretch your repayment over five, six, or more years, be sure that the lender offers your desired term length.
- Last but not least, see if the lender offers any other appealing features. Some lenders give borrowers free access to their FICO Scores, others have built-in forbearance options that allow borrowers to suspend repayment during tough times, and some have rewards for on-time repayment. While these shouldn’t be the primary reasons to consider a lender, they should be part of the decision-making process.
Once you’ve narrowed down your list, go ahead and get pre-approved with each of the lenders. Write down the annual percentage rates (APRs) and loan terms they’re prepared to offer you.
You might be surprised at how dramatically the APRs offered to the same borrower can vary. When I applied for a personal loan a few years ago, the difference between the best and worst loan offers I received was nearly 10 percentage points.
Be sure to compare the APRs of each loan, not just the interest rates. APRs include any origination fees a lender might charge. Since many personal lenders don’t have origination fees, this helps make an apples-to-apples comparison of each loan’s cost.
The personal loan application process
Once you’ve decided on the personal loan that makes the most sense for you, you’ll need to proceed past the lender’s pre-approval process and complete a loan application.
When you apply for a personal loan, you’ll be asked for a bunch of information that wasn’t part of the pre-approval process.
For example, the lender will want to verify your income with a W-2 or 1099, pay stubs, and/or a recent tax return or two. You’ll probably also need to submit a copy of your driver’s license or other ID and your Social Security card.
It’s also a good idea to have your bank account information handy. Lenders generally don’t require you to automate your loan payments, but many offer an interest rate discount if you do.
Expect several rounds of documentation requests before the loan can be finalized. This is especially true if you’re self-employed or if any part of your application is complicated. This is normal, so try not to get frustrated with your lender.
Once all of your documentation is received and verified, your lender will send you a promissory note and other documents. Once you sign them, your funds can be disbursed. Depending on your lender, your funds should show up in your bank account within a few days of finalizing the loan.
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About the Author
Matt is a Certified Financial Planner® and investment advisor based in Columbia, South Carolina. He writes personal finance and investment advice, and in 2017 he received the SABEW Best in Business Award.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
