How to prequalify for a personal loan (and protect your credit)

Understanding how and why to prequalify for a personal loan

At some point, we’ll likely all need to borrow money. Maybe you’re looking at a big home renovation project, or you’d like to install a pool. But getting a loan can feel daunting, and it can be hard to know how much you can afford to borrow or how much lenders might be willing to give you. Getting prequalified can be a great first step in applying for a personal loan. Prequalification lets you review your potential loan offers so you can compare possible rates and terms and determine how much you might be able to borrow. And because it only requires a soft credit inquiry, you don’t have to worry about a hit to your credit score.

What is personal loan prequalification?

When you prequalify for a personal loan, the lender does a fast, informal review of your credit worthiness and basic information to estimate your loan amount, interest rate and terms. It’s basically a way to figure out how much you’ll likely be able to borrow without having to fill out a loan application and actually apply for it. Think of it as a sneak peek at possible loan rates and terms so you can shop around for one that fits your need without hurting your credit score.

But while prequalification can make it easier to find a loan that works for you, it’s important to remember that it’s not a guaranteed approval on a loan. Prequalification is not a formal approval or final offer, and when you do officially apply for the loan, the lender will run a hard credit check that can affect your credit score.

Prequalification versus preapproval: What’s the difference?

Often, lenders will offer prequalification or preapproval. They sound similar: Both review information you provide to the lender to determine how much money you’ll likely be able to borrow and at what rates. But while prequalification is a quick, informal estimate, a preapproval is a conditional commitment from the lender that can make it easier to shop for a big purchase like a home or a car.

Another difference? The prequalification process uses a soft pull on your credit report, so it won’t affect your credit score. During the preapproval process, the lender will run a hard credit check, which can cause your credit score to drop slightly.

Prequalification versus preapproval

How to prequalify for a personal loan in 4 steps

Getting prequalified can help you determine how much you might be able to borrow and at what interest rate. Here’s what you’ll need to do.

Step 1: Calculate how much you need to borrow.

If you’re shopping for a home, you’ll likely need to borrow considerably more than you would if you’re looking to buy a car. Look at your current budget to get an idea of what size loan payment you think you could comfortably handle each month. It can be tempting to go for the biggest loan offer and as much money as possible, but try to borrow only what you really need and can afford.

It’s also a good idea to look at your credit score. The better your score, the better the terms and rates you might qualify for. Checking it now can give you a chance to correct any errors or take steps to improve it. And don’t forget to factor in any extra fees that could increase the cost of your loan, like origination fees.

Step 2: Gather your financial information.

In addition to checking your credit score to make sure you meet lenders’ minimum requirements and to dispute any errors that could affect your approval chances, you’ll need to provide other information to the lender:

• Personal information, like your name, date of birth and Social Security number
• Your annual income and details about your employer
• Your current “big” expenses, like housing payments or car payments
• Your desired loan amount and purpose

Some lenders might ask for more information, like whether you have any savings or the amount in your retirement or investment accounts. The prequalification is based on the information you provide, so it’s best to be honest and as accurate as possible. That way there are no surprises when it’s time to apply for the loan.

Step 3: Submit a prequalification form.

This is usually a quick process done online. You’ll fill out an online form with your personal and financial information. At this point, the lender will usually run a soft credit inquiry, which doesn't show up on your credit report. That means you can shop around and prequalify with multiple lenders without dinging your credit score.

After submitting the prequalification form, you should get potential loan offers within a few minutes.

Step 4: Review your potential loan terms.

Your prequalified personal loan offers usually will include:

• The amount you qualify for
• Your likely annual percentage rate
• The proposed repayment term
• Your estimated monthly payments

These are all just estimates and could change during the final underwriting process. If your offer doesn’t include the total interest costs, you can calculate it using a personal loan calculator. That can help you figure out the true cost of the loan.

Does prequalifying guarantee a loan?

While prequalifying for a personal loan can help, it’s important to remember it’s not a guarantee or a loan approval. The loan offers and terms you prequalify for are estimates based on the information you provided; once the lender reviews and verifies your financial information using documentation like bank statements, pay stubs and W-2s, the loan terms and amount could change.

Your final loan application also requires a hard credit pull, with the lender taking a more detailed look at your credit history, which could also change the final offer.

Frequently asked questions

1. Does prequalifying for a personal loan hurt my credit score?

No. Prequalifying for a personal loan doesn’t affect your credit score because lenders do a soft credit check, which is not visible to other lenders and has no impact on your score. With a soft credit inquiry, lenders view a summary of your credit history, including your account statuses, payment history and credit utilization, and are strictly for informational purposes.

2. Does prequalification guarantee I will get the loan?

No, prequalification is not the same as preapproval. Prequalification is based on unverified information you provide to the lender and a soft credit check, and is meant to be used as an estimate of how much the lender might be willing to lend you and at what possible terms. It does mean that the lender has determined you meet at least some of their requirements to be approved for a loan, but the amount, rate and terms all could change when you formally apply and they do a hard credit check.

3. What information do I need to provide to prequalify?

To prequalify for a personal loan, you’ll need to provide some basic information about yourself, like your name, date of birth, Social Security number, address and contact information. You’ll also have to share information about your annual income and your employer, as well as how much you’re hoping to borrow and why.