A personal loan is usually unsecured and can help you get a lump sum of money for various purposes. You can use it to settle your car repairs, medical expenses, or even to consolidate your high-interest debts.
Several lenders offer personal loans with low-interest rates and favorable terms. However, getting one might be challenging if you have poor credit. When you prequalify for a personal loan, you can see what loan terms you can avail of, which helps you determine if getting a personal loan makes sense for your current financial situation.
The best thing about prequalifying is that it doesn’t hurt your credit score.
How Prequalifying for a Personal Loan Works
Whether you plan to get online payday loans or a car title loan, it’s necessary to provide accurate information to your lenders. It is also true when prequalifying for a personal loan.
During the prequalification process, the lender will ask you to provide some basic information, including the loan amount you want to borrow, your current income, and how much debt you might be able to manage. These prequalification requirements vary by lender.
After providing the essential information, the lender prescreens your credit standing before you can proceed to complete your loan application. Then, the lender makes a soft inquiry, which doesn’t hurt your credit score, to get an overview of your creditworthiness. During this stage, the lender will look at critical factors such as your outstanding debts and repayment history to evaluate the risk of lending you some money.
When you prequalify for a personal loan, you get the details of the loan you want to take. It has the loan amount, interest rate, and term. If you like the offer, you can then proceed to complete your personal loan application.
Keep in mind that prequalifying for a personal loan doesn’t guarantee approval. You will still need to complete the application and provide additional information and documentation the lender might require, which might impact the loan offer.
During the application process, the lender will most likely run a full credit check, which places a hard inquiry on your credit report and affects your credit score.
Tips for Prequalifying for a Personal Loan
If you want the prequalification process to go in your favor, consider these tips:
Check Your Credit Score
As mentioned earlier, personal loans tend to be unsecured. It means the lender will not require you to give collateral, but they will significantly evaluate your financial history to determine if you qualify for a personal loan.
Your credit score carries the multiple financial information your lender needs during the prequalification process. Viewing your credit score gives them access to your credit utilization ratio, payment history, credit inquiries, and other relevant financial information, making it a reliable indicator for your loan approval.
With this, it's safe to say that having bad credit might be challenging to qualify for a personal loan. If that is the case, it's best to work on improving your credit score before you decide to prequalify. Below are some steps you can take to increase your credit score:
- Pay your bills on time;
- Reduce your credit utilization;
- Review your credit report and dispute any inaccuracies.
Calculate Your Debt-to-Income Ratio (DTI)
Lenders also consider your debt-to-income ratio in deciding whether or not you qualify for a personal loan because it reflects your ability to afford a new loan. Most lenders want you to have a DTI ratio of 35% or less.
If you want to calculate your DTI ratio, you will need to divide your monthly debt payments and gross income. If the product is higher than 35%, consider paying off some of your debts or look for opportunities to increase your income before you apply for a personal loan.
Look for Lenders that Work on Your Credit Band
Look for lenders with a history of working with borrowers who have the same credit profile as you. They should be familiar with your current financial situation and would go the extra mile to offer the best loan offer.
Some lenders specialize in working with borrowers who have poor or bad credit. So, if you belong to this group, look for lenders that are a good fit for you. That way, you won’t have to worry about not getting a personal loan despite having bad credit.
To Wrap It All Up
Prequalifying for a loan doesn’t harm your credit score because the lender only goes for a soft credit inquiry to assess your creditworthiness. However, it doesn’t guarantee loan approval; it only gives you a glimpse of what you can get if your loan gets approved.