Personal loans can be a great help if you need more cash for a huge expense. These installment loans are usually unsecured and can serve lots of purposes. In other words, personal loans can be used for whatever purpose, from paying an expensive medical procedure or home repairs to consolidating debt with high-interest.
The good thing about this type of loan is that they can have lower rates, unlike credit cards. Plus, personal loans offer fluidity of using the money as you see appropriate. However, getting approved for this loan can be a real challenge.
And it’s more than true if your credit is not a good one. For this reason, it is a good idea to prequalify for a personal loan to get an idea of what you can be eligible for and things to consider for loans. What’s more, this process does not damage your credit score.
Prequalifying For A Personal Loan: What It Means
Lenders usually prescreen the borrower before completing an application when they go through the pre qualifying process for a personal loan. The process of prequalifying for a personal loan lets you know if you’re probably getting approved and what the terms will likely be if your loan application is doing well.
When starting the process, you must hand out some general information to a creditor, for instance, your income, how much money you want to borrow, and how much debt you have. However, take note that the requirements will usually differ from creditor to creditor.
Then, the lender assesses your credit to get a snapshot of your creditworthiness. Often, lenders inspect factors such as the borrower’s outstanding debts and repayment history to check the risk of lending.
Moreover, lenders also run a soft inquiry to your credit. This inquiry does not affect your credit adversely. Once you get prequalified for a personal loan successfully, the creditor will give you the details of the loan you are qualified for.
If you agree with the interest rate, term, and loan amount, you can choose to complete the entire loan application. However, keep in mind that getting prequalified for a personal loan does not assure you’ll be approved.
Still, you have to apply for the loan and hand out some information and documentation that could modify the decision or offer of the lender. Additionally, the lender will run a hard inquiry on your credit upon application.
Pre Approval Vs. Prequalification
When you are applying for credit cards and loans, you will likely hear the phrases prequalification and preapproval. According to Experian, some creditors use these phrases similarly.
However, other lenders put a different meaning to the terms. Essentially, both phrases refer to a process wherein a creditor gives borrowers a conditional acceptance for a loan, pending a review of your credit report and finances.
Generally speaking, prequalification might require less information and be less stringent, unlike a preapproval. Often, if you get a preapproval offer for a credit card, it literally means you have been pre-assessed and are being presented with particular terms.
In both situations, if you want to complete the applications, the lender will run a hard credit inquiry. Pre Approval doesn’t assure that you’ll be approved for the loan once the creditor reviews your application, just like in the prequalification process.
Reasons To Get Prequalified
When you go through the process of prequalification, you get the opportunity to discover and learn if you are probably to be approved or not. Also, you will find out the terms without affecting your credit.
With that said, if you get rejected or not satisfied with the terms offered, your credit will not be adversely affected. Additionally, it means that there is no harm or risk in getting prequalified by various creditors, thus allowing you to compare different options.
What’s more, getting prequalified for a loan gives you more time to assess the estimate and ensure you can manage to pay the monthly payment. Keep in mind that personal loans typically have fixed rates. Therefore, your payment for each month is the same.
Knowing what you have to pay every month can be very beneficial. Even so, you must see to it that the monthly payments fit your budget. Take the time to discover what works best for your budget because there are creditors who offer different options with varying terms that can alter the amount you have to pay every month.
Takeaway
Remember that your credit score is an important factor in whether you can get prequalified and eventually get approved for a personal loan. Also, it affects the terms of your loan, particularly your interest rate. If you are not happy with the rates offered in the prequalification process and you don’t need the money right now, consider improving your credit before taking out a personal loan.