What Does It Mean to Be Pre-approved for a Personal Loan?
EXPECTED READ TIME:5 minutes
October 21, 2022
Looking for a way to consolidate debt or pay for a vacation? Trying to finance a home improvement or make a big-ticket purchase?
If you find yourself in any of these situations — or if you need cash for countless other big-ticket purchases — it might be time to get pre-approved for a personal loan.
Read on to learn why, when, and how to seek a personal loan pre-approval.
What Is a Personal Loan Pre-approval?
A personal loan pre-approval is the process you can go through to assess your chances of being approved. When you request a pre-approval, a lender will review basic financial information like your income, debt, assets, and credit score to determine if you qualify for a loan. They’ll also estimate how much money you can borrow and provide a clearer picture of the annual percentage rate (APR), terms, and fees that would be associated with a loan.
Why You Should Get Pre-approved for a Personal Loan
Although not required, getting pre-approved for a personal loan is a quick and easy way to remove some of the guesswork involved in formally applying for a loan. Basically, it can help you:
Determine if you’re eligible. Regardless of the reason you’re trying to take out a personal loan, getting pre-approved can help you understand your chances of ultimately being able to borrow the money you need. This can save you from formally applying only to find out you don’t qualify for lending.
Compare offers and rates. Getting pre-approved for a personal loan allows you to compare the amount of money you might be able to borrow — and at what interest rate — from multiple lenders. Using this information, you can choose the loan with the best rates, terms, and conditions.
Improve your situation. In and of itself, getting pre-approved for a personal loan doesn’t boost your odds of being approved. However, the pre-approval process may show that reducing bad debt or improving your credit score (or both) would put you in a better financial position to qualify for a loan at the best rate.
If you’re thinking about taking out a personal loan, make time to get pre-approved.
One of the best things about getting pre-approved for a personal loan — aside from the insights that you gain — is the cost: nothing.
Pre-approvals should always be free, and most won’t impact your credit score because they usually require only a soft credit check. That said, confirm that any potential lender doesn’t charge hidden fees or request a hard inquiry, which would lower your credit score temporarily.
Always be sure to check with each lender since the terms “pre-qualified” and “pre-approved” can sometimes be used interchangeably, and it’s possible you may find some lenders will still do a hard pull for a “pre-approval.”
Does Pre-Approval Guarantee a Personal Loan?
Unfortunately, getting pre-approved for a personal loan doesn’t guarantee you’ll ultimately be approved. Your loan application still has to go through underwriting, which is when the lender will request a hard pull on your credit report and dig deeper into your financial information.
If something comes up during this stage — like, say, the lender can’t verify your income, your credit utilization ratio is higher than 30%, or you have too much bad debt — your official loan application may be denied.
Pre-approval doesn’t guarantee you’ll ultimately be approved. Your loan application still has to go through underwriting.
4 Personal Loan Pre-approval Tips
Even though getting pre-approved for a personal loan doesn’t guarantee you’ll be able to borrow money, you should still strive to put your best foot forward. These three tips will make the pre-approval process more productive:
Check your credit. You’re entitled to a free copy of your credit report, so make sure to request yours and verify or correct errors on it before applying for pre-approval. Taking time to check your credit report — and, more importantly, addressing any issues you find — will boost your chances of getting pre-approved for a personal loan.
Research lenders and rates. Before seeking pre-approval for a personal loan, research the websites of several credit unions, banks, and online lenders. Search for lenders who offer the best rates and terms and charge few or no fees. Then plug the numbers into a loan calculator to estimate your monthly payments with different loans.
Gather your paperwork. Although you don’t have to provide supporting documentation to get pre-approved, you’ll need it if you apply for a loan. Pulling together the following paperwork will allow you to provide the most accurate information for your pre-approval and give you everything you’ll need for your formal application:
- Driver’s license, passport, or state or military ID
- Social Security card or number
- Pay stubs or W-2s
- Bank and credit card statements several months back
- Copies of other loan agreements
Seek multiple pre-approvals. Since it shouldn’t cost anything or hurt your credit score to get pre-approved for a personal loan, feel free to seek pre-approvals from two or three lenders. The more options you have, the better your chances of finding a loan (and lender) that works best for your financial situation.
Estimate your monthly loan payments and find out what you can afford.
How to Get Pre-approved for a Personal Loan
Applying for a personal loan pre-approval is straightforward and only takes a few minutes. The process typically includes:
Completing a pre-approval form on the lender’s website or at a branch of your credit union or bank. While you’ll be asked about your income, assets, debt, and employment, you won’t have to provide actual documentation at this stage.
Having your credit pulled. The lender will request a soft inquiry on your credit report so they can review how you’ve managed and repaid debt in the past. This gives them an idea of your creditworthiness and whether you’re likely to pay back what you borrow.
Receiving a pre-approval offer. If your pre-approval request is approved, the lender will make a personal loan offer letter. This document outlines the maximum amount you can borrow, as well as your estimated interest rate and other terms and conditions — as long as your loan passes the formal underwriting process.
After you’re pre-approved, you can either accept the offer and move forward with a formal application or reject it and keep exploring other loan options. Either way, you’ll have a few weeks to make a decision before the offer expires.
Pre-approvals should always be free, and most won’t impact your credit score because they only require a soft credit check.
If you’re thinking about taking out a personal loan, make time to get pre-approved. The insights you’ll gain with this fast, simple, and effective tool will help you understand whether to move ahead with a loan application or focus first on improving your financial situation.
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