4 steps to pre-qualify for a personal loan
Applying for a personal loan can be a lengthy process and quite frustrating if you have to spend a lot of time on the application process and are then turned down.
There’s a quicker way to get an answer, however, and it involves some simple steps to ensure you have pre-qualified before the loan application process begins. Pre-qualification also lets you compare a number of loan offers, including mortgages and credit cards, and helps you keep a check on your credit score. Lenders will still need to verify your financial details before your personal loan is finalized.
These are the four stages your pre-qualifying application will go through:
Choose the lender that you are interested in getting pre-qualified with or use a service like Monevo, where you can search multiple lenders online for free of charge – and it won’t affect your credit score. When you’ve made your choice, complete the initial form with basic information such as your occupation, income and the total of any existing debt.
The lender assesses your credit history and credit score using a basic, preliminary credit check and uses this to estimate your risk level as a borrower.
Following these two simple steps, the lender may offer a pre-qualification or withhold it. If you are successful, you’ll receive more information about the terms and conditions that will apply.
Finally, you can accept the pre-qualified offer or decline it. On acceptance, you will need to verify any details requested by the lender during the formal loan approval process.
What information do I receive during the pre-qualification process?
Any pre-qualifying loan offer you receive will be personalized to fit with your financial profile. You will receive preliminary information detailing the amount you can borrow, the interest rate payable, the loan term amount, monthly payment amount and the total repayment amount (including interest and fees if applicable). Always bear in mind that these terms and conditions may vary when the lender receives your full financial details.
Does pre-qualification impact my credit score?
Credit scores are usually only impacted when a lender is making a ‘hard inquiry’ into your financial history and commitments. This may happen, for example, during the formal loan approval process. It is very unlikely to happen as a result of the ‘soft inquiry’ for a pre-qualifying loan. This inquiry should not show up on your credit report as lenders recognize that it’s desirable to make a comparison before opting for a specific financing option.
Once you decide to proceed with a loan application, you will find that the lender acts to verify your financial history and performs a hard credit check. Such inquiries usually appear on your credit report for up to 12 months and may temporarily reduce your score by a few points.
What’s the difference between pre-qualification and preapproval?
Although the two terms sound similar, there are key differences between the loan processes of: pre-qualification and preapproval. Pre-qualification for a loan is based on basic information such as your: identity verification, credit score, finances , and any factors affecting your credit score. An important difference to note is that pre-qualification requires a soft credit check and this does not harm your credit score. The preapproval application however, requires much more documentation from you to verify your financial history and stability. The preapproval application also requires a hard credit check and this will impact your credit score. For example, larger borrowings, such as for a mortgage, are often referred to as ‘preapproved’ loans.
How can I boost my chances of approval? Your credit score reflects your financial history and is affected by your ability to repay debts in full, to manage your finances well and to pay bills on time. As long as you are seen to be managing your financial funds well, your credit score should stay strong. The lender will want to see that you are capable of repaying whatever loan amount you wish to borrow on time. For instance, if you can manage to repay credit card balances in full each month, you’ll make a positive impression.
What happens after pre-qualification?
If you are applying online, most lenders will issue a notice of pre-qualification within a few minutes of your pre-qualification application being made. Once this happens, a lender will help you to go through the formal process to make a loan application. They will inform you of the documentation they need in order to verify your financial status. Often, this will include recent tax returns and bank statements.
I got an adverse action. What does that mean?
A notification of adverse action is simply what happens if you have been turned down for a loan. Often, this is due to a low income level or a poor credit rating. Usually a lender will contact you in writing or by telephone to let you know. They will tell you which credit agency they have received information from and help you to obtain a free copy of your credit report. You have the option of looking elsewhere for funds or working to improve your credit score before making any further loan application.
How do credit scores work?
Everyone is entitled to check their credit history free of charge. It’s a good idea to do this before applying for a loan as it will give you a guide as to what a lender will see when they check your finances. As well as helping you qualify, a strong credit score can also help you obtain a lower interest rate on your personal loan. In general, scores fall into the following categories:
720 and higher: Excellent credit 690-719: Good credit 630-689: Average or fair credit 300-629: Bad credit
If you find your score is lower than you (or a lender) would like, take steps to build it up before you apply. The biggest factors affecting your credit score are making payments on time and the amount of credit you use.
What should I look out for?
To improve your credit rating try to avoid the following:
Missed payments — The fact that you have skipped a payment at all looks bad on your credit report. Details of late or missed payments remain on credit reports for up to seven years from the original date.
Charge-off — If a creditor decides they won't be able to recover the money you owe, they may write your account off as a loss, and may continue to report the past due amount and balance owed. Should the creditor sell on your debt, you may find a collection agency will try to make you pay back the debt.
Settled accounts — if a creditor agrees to accept less than the total amount you owe, your debt is considered settled. However, such settled accounts are still considered to be negative information in terms of your credit reports.
Other actions — such as bankruptcy, repossession, foreclosure and voluntary surrender all have negative impacts on your credit report.
Ready to get pre-qualified?
If you’re thinking of getting a personal loan, we can help. You can search our panel of lenders online for free and it won’t affect your credit score.