How To Prequalify for a Personal Loan

Applying for a personal loan can be a nerve-wracking experience. Will the lender approve you? Will you get the amount you asked for? What annual percentage rate (APR) will you have to pay? While there's no financial button you can press to answer those questions exactly, there is a way you can get a good idea of what your personal loan might look like: prequalification.

What is prequalification?

Prequalification is a quick process that doesn't require a hard credit check and can give you a good sense of the rates and terms you can expect from a lender before you fill out an application for a loan. A personal loan prequalification is free of charge and typically takes less than five minutes to complete. Most lenders let you prequalify directly on their website. But with some lenders, like Jenius Bank, LightStream, and BHG Financial, you'll need to prequalify via a personal loan marketplace, like Credible.

In general, lenders ask for basic personal information, such as your name, address, date of birth, income, and, in some cases, your Social Security number. A good rule of thumb is to prequalify with multiple lenders at once through a personal loan marketplace or with at least three lenders individually, so you can compare loan quotes to get the best deal.

How does loan pre-qualification work?

Personal loan prequalification is a process where a lender collects information from you to determine your eligibility for a loan offer and provide an estimate of rates, terms, and loan amount.

During the process, lenders often require information such as:

• Desired loan amount
• Loan purpose
• Name
• Home address
• Employment status and annual income
• Birthdate
• Social Security number (not always)
• Whether you own or rent your home
• Level of education
• Email address

Once you submit a prequalification request, the lender analyzes your information to determine if you prequalify. If you do, the lender will show you the loan amounts, annual percentage rates (APRs), and repayment terms you might qualify for.

The quote you receive is not a guaranteed loan offer; it's only an estimate based on the information you provided. An official loan offer will hinge on a formal application and, in most cases, a hard credit check. Unlike the soft credit check performed during prequalification, a hard credit check could temporarily lower your credit score.

Interest rates and loan amounts by credit score

Understanding what factors affect loan decisions can help you even before prequalification.

If you're curious how likely you are to qualify for a personal loan, what rate you might get, or how much money you might be approved to borrow, take a look at the charts below, which are based on Credible user data over the past 12 months.

In the first chart, we see that borrowers with high credit scores are likely to qualify for the lowest interest rates and highest loan amounts. So if you have poor or fair credit but need a larger loan amount, consider taking action to raise your credit score by lowering your debt-to-income ratio (DTI) and making on-time payments.

Personal loan interest rates by credit score

But many people who apply for personal loans don't have excellent credit. In the second chart, we see that average FICO scores, regardless of income, tend to be in the middle of the good credit score range. And income can serve as a compensating factor to help you get a lower rate or qualify for a larger loan.

Personal loan interest rates by income

What to know about APR

The Truth in Lending Act of 1968 requires all lenders to communicate the costs of loans and credit using APRs so that consumers can more easily compare offers and understand which are the cheapest. So, as you prequalify, compare the APRs between multiple loans and lenders, and look for the lowest.

The APR is a percentage that communicates the yearly cost of borrowing in relation to the total amount being borrowed, which includes the interest rate and any upfront fees (like origination and administrative fees).

You shouldn't find yourself needing to calculate it, which is a good thing, since calculating the APR can be difficult unless you have a financial calculator (and know how to use it) or an APR calculator.

You can also use an APR calculator or a personal loan calculator like the one below to see how much interest you'll pay over the life of the loan.

Some loan calculators will even show you the amortization schedule or payment schedule to see how much interest and principal you'll pay per month. (As you make monthly payments, the interest portion of your payment decreases, and the principal portion increases.)

5 steps to qualify for a personal loan

Though loan prequalification is a pivotal first step to knowing whether a personal loan is an option for you and how much it might cost, it's not the most important piece to getting a loan.

You should also review your credit and finances (to avoid surprises), research lenders, review and compare quotes, and formally apply for a loan.

1. Review your credit and finances

It can be tempting to go straight to completing a prequalification form. But, before you do, take a few minutes to look over your credit scores, credit history, and finances.

• Credit score: Your credit score is a big factor in your loan terms. The higher the score, the lower your APR, generally speaking. Most lenders consider your FICO score from one or more of the three credit bureaus: Experian, TransUnion, and Equifax. You can check your credit score for free using Credible's free credit monitoring tool.
• Credit history: Visit AnnualCreditReport.com to see your credit report for free. While you can't see your score here, you can review your credit history to ensure that all information is accurate. If it's not, resolve the inaccuracies with the bureau reporting them before you prequalify — your credit scores may go up as a result of the correction.
• Finances: Identify how much room you have in your monthly budget for a loan payment, and consider upcoming expenses that could impact how much you can devote to a monthly payment.

2. Research lenders

Look for lenders that cater to your financial profile and needs.

• Minimum credit score and income requirements: Many lenders disclose the minimum credit score they require, and some also share how much you'll need to make annually to be eligible for a loan. (You can see this information for Credible lenders here.)
• Loan terms and fees: Lenders also offer different loan amounts, APRs, and repayment terms. And some charge more fees than others — keep an eye out for origination fees, which are often based on a percentage of your loan amount and charged upfront.
• Time to fund: Another important factor to consider is how quickly the lender can approve your application and fund your loan. Some lenders can approve and fund a loan as soon as the same day you apply, while others may take a few business days to process your application and send money.

3. Prequalify

Now that you've done some legwork, prequalify with the lenders that offer the loan amount and repayment term you need. If you prequalify through a personal loan marketplace, you only have to submit one prequalification form to have your preliminary information sent to multiple lenders.

4. Review and compare quotes

Once you've prequalified, compare the following aspects:

• Monthly payment
• APR
• Loan term
• Fees
• Total cost

As you compare quotes, remember what is most important to you. If you have plenty of room in your budget and want to pay off your loan quickly, consider a higher monthly payment in exchange for a lower APR and shorter loan term. However, if you have a hard cap on how much you can pay each month, prioritize monthly payment — it could make sense to opt for a longer repayment term and higher APR so you can get an affordable payment.

5. Formally apply for a loan

After choosing the best prequalification quote, submit the formal application. During this process, you'll likely need to provide proof of income, bank information (statements and account and routing numbers), and other information the lender needs to assess your financial situation. If you have any questions about what's required on the application, reach out to the lender for answers.

If the lender approves your application, review the loan contract and sign. Remember, any mistakes you make on your application or information you leave out could prolong the loan process.

Advantages of prequalifying for a personal loan

The main advantage of prequalifying for a personal loan is clarity. A prequalification gives you a good sense of what your loan terms might look like and alleviates (or confirms) any doubts you have about whether you can afford a personal loan.

The second advantage of prequalifying is that you can use it to compare multiple lenders and loans, and potentially increase the chance you'll find a loan that meets your needs and priorities.

Another advantage of prequalification is that it doesn't hurt your credit. You can get as many prequalification quotes as you'd like without hurting your credit.

Personal loan prequalification vs. preapproval: Key differences

Generally speaking, pre-qualification and preapproval are the same thing when you're applying for a personal loan. They're the lender's way of doing a basic assessment of your financial situation to generate possible loan amounts, terms, and APRs.

If you're using a home loan to buy a house, however, prequalification and preapproval are different. Some lenders may let you prequalify based on unverified information, similar to a personal loan. A preapproval, on the other hand, is a more thorough process based on verified information and requires a hard credit inquiry. The latter also holds more weight with sellers.

How to prequalify with bad credit

If you have bad credit, you may still be able to prequalify for a personal loan through the following methods.

Find lenders that approve bad credit borrowers

Every lender serves a certain segment of the market and sets its underwriting requirements accordingly. LightStream, for example, caters exclusively to borrowers with good to excellent credit profiles, while Upstart allows applicants with credit scores as low as 300 through its website.

To prequalify for a loan despite bad credit, you'll need to find lenders that approve borrowers with your credit score and financial profile. You can do so by researching their eligibility requirements individually, or by using a personal loan marketplace that runs your prequalification application through a network of lenders.

Related: What Credit Score Do You Need for a Personal Loan?

Enlist the help of a cosigner

Another option is to apply with a cosigner. A cosigner is a person who agrees to pay for a loan if the primary borrower can't or won't. If you can find someone with good credit who is willing to cosign for you, their guarantee can help you get approved.

Keep in mind that the loan will impact their credit and financial situation if you default. To preserve the relationship, ensure you can afford the payments and let them know immediately if you foresee missing a payment.

Compare: Co-applicant vs. Cosigner

Explore secured personal loans

Secured personal loans are backed by a piece of collateral, such as a car or bank account. If you're having trouble getting approved, look into lenders that allow borrowers to pledge collateral.

Doing so can help to strengthen your application and improve your odds of getting approved. However, beware that if you default, the lender will have the right to seize and sell the asset you pledge.

Compare: Secured vs. Unsecured Personal Loans

Work on building your credit

If you can't get prequalified for a suitable personal loan now, consider spending some time working on your credit. The main ways to improve it are making on-time payments over time, paying down revolving credit lines, and ensuring you have a mix of open revolving and installment credit accounts.

You can also look into getting a credit-builder loan, which is designed for borrowers with little to no credit history, to help improve your credit score.

How to proceed if you can't get prequalified

If you can't prequalify for a personal loan, you're not out of options. You might be eligible for a loan from an emergency lender or a no-credit-check lender until you can get your credit in shape enough to qualify for a personal loan. Or, you might pursue a debt management plan through a certified credit counselor or another debt relief program. A loan through a family member or close friend could be a prudent option as well.

Keep in mind that every lender has different borrower requirements, too. One lender may reject your prequalification because your credit score is too low, but a lender that specializes in giving loans to borrowers with lower credit scores may not.

Jessica Walrack contributed to this story.

Disclosure: Some lending partners that participate in Credible's comparison marketplace offer loans to borrowers with scores as low as 550. Borrowers with low scores will have fewer lending options than borrowers with higher credit scores.