Applying for pre-approval is an important step in obtaining a personal loan. And while it may seem like splitting hairs, it is is other than a formal permit.
Pre-approval allows you to shop around various lenders without compromising your creditworthiness, and it is not a guarantee that you will be approved for a personal loan. Here’s what you need to know.
What is a personal loan pre-approval?
Pre-approval is a first step in obtaining personal loan approval. “It’s good to go through a pre-approval process first just to know where you are,” says Trina Patel, financial advisory manager at Albert, a money management app.
When you’re looking for credit options and applying for pre-approval, lenders run a gentle credit check that doesn’t affect your credit score. But when you formally apply for a loan, it creates a tough credit pull that can – and linger on your credit report for up to two years.
Getting pre-approved is – and should always – be free. During the pre-approval process, lenders review your credit history, income, and other assets. Her goal is to “evaluate how likely it is to repay the loan,” says Patel.
If you qualify for pre-approval, the lender will send you a letter of offer with a loan amount, interest rate, and other terms. If you wish to accept the offer, you will need to go through the formal application process, which requires the provision of documents such as pay slips, ID and your social security number.
Before accepting a personal loan offer, think about what you can comfortably afford each month. Don’t take on new debt without finding out if your budget can hold it and if you can pay it off in a timely manner.
Remember, pre-approval is not a promise. “That doesn’t guarantee you’ll be approved,” said Tara Alderete, director of enterprise learning at Money Management International, a nonprofit financial advisory and education agency. “When you get pre-approved and something changes [to your income or credit report], you can still be denied this loan, ”says Alderete.
How to apply for pre-approval
In general, here is the process of applying for a pre-approval for a personal loan.
- Complete the pre-approval form on a lender’s website: You will be asked about your income, employment and debts, but you are not required to provide documented evidence at this point.
- The lender performs a soft credit pull: The lender will look at your credit report – including your payment history – and determine if you are a trusted borrower.
- Receive a pre-approval offer when you qualify: If you qualify for pre-approval, the lender will offer a personal loan offer that includes the maximum loan amount they are willing to renew, the interest rate and any other loan terms. However, if you fail the gentle credit check, your application will be denied.
- make a decision: You can either accept or decline the pre-approval offer. Lenders differ in how long pre-approval takes, but it probably won’t take more than a month.
- Provide documentation: If you accept the offer, you will be required to provide documents proving your income, employment and / or assets, as well as personal information such as your social security number.
The process for applying for a pre-approval is pretty straightforward, but there are a few things to keep in mind when looking for and taking on a personal loan officer.
Don’t go with the first lender who offers you pre-approval. Take a look around and see what types of loans are out there. We recommend applying for personal loan pre-approvals from banks, credit unions, credit aggregators (like LendingTree), peer-to-peer lenders (like LendingClub), and specialist lenders (like SoFi). Cast a net as far as you can.
There is no limit to the number of pre-approvals you can apply for. Since only a gentle credit check is required for pre-approval, your creditworthiness will not be affected by too many applications. “That’s the beauty of the pre-approval option,” says Alderete. “You can well imagine what [the personal loan] will look without hurting your credit. “
Check the fine print and credit terms
Read the offer in full before accepting it. You want to make sure that the loan amount and interest rate meet your needs – but you also need to check other terms of the loan, such as the loan amount) and prepayment penalties (a fee charged to the borrower for repaying the loan early). “You want to make sure you don’t have any of these penalties,” says Patel. “If you can pay off your loan sooner or invest a little more in the payout, then you should be able to do so without being charged more.”
Let the pre-approval expire before accepting the offer
A pre-approval offer doesn’t last forever. You cannot apply for pre-approval for a personal loan and take advantage of the offer for several months. “You have to make a decision pretty quickly, usually within a week or two,” says Patel. Lenders know your financial situation can change, so pre-approvals are usually short-term measures to assess the likelihood of your loan being repaid.
Take More Money Than You Need To
Those with strong credit ratings may get pre-approved for more money than they originally asked for. However, just because you qualify for a larger loan amount doesn’t mean you should take it on. “If my idea was to get a $ 5,000 personal loan for a home repair, I wouldn’t want to do anything about it,” says Alderete. “That’s one thing people run into – they wanted $ 5,000 and got $ 10,000 and they’re going into more debt than planned.”