Dos and Don’ts for Personal Loan Pre-Approval
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Applying for pre-approval is a crucial step in obtaining a personal loan. And while it may seem like a haircut, it is different from formal approval.
Pre-approval allows you to shop with different lenders without changing your credit score, and it is not a guarantee that you will get approved for a personal loan. Here’s what you need to know.
What is a personal loan pre-approval?
A pre-approval is a preliminary step in obtaining personal loan approval. “It’s good to go through a pre-approval process first, just to find out where you are at,” says Trina patel, head of financial advice at Albert, a money management application.
When researching loan options and applying for pre-approval, lenders will perform a smooth credit check, which does not affect your credit. But when you officially apply for a loan, it results in a sharp drop in credit, which does and may stay on your credit report for up to two years.
Obtaining pre-approval is – and always should be – free. During the pre-approval process, lenders will review your credit history, income, and other assets. Their goal is “to assess the likelihood that you will be able to repay the loan,” says Patel.
If you qualify for pre-approval, the lender will send you a letter of offer with the loan amount, rate, and other terms. If you want to accept the offer, you will need to go through the formal application process, which requires providing documents, such as pay stubs, ID, and your Social Security number.
Before accepting a personal loan offer, think about what you can comfortably afford in monthly installments. Don’t start new debt without determining if your budget can accommodate it and if you can pay it off within a reasonable timeframe.
Keep in mind that pre-approval is not a promise. “This does not guarantee that you will be approved,” says Tara Alderete, director of corporate apprenticeship at International money management, a non-profit financial advisory and education agency. “If you get pre-approved and something changes [to your income or credit report], you can still be refused this loan, ”says Alderete.
How to request pre-approval
Usually, here is the personal loan pre-approval application process.
- Fill out the pre-approval form on a lender’s website: You will be asked questions about your income, employment, and debt, but you will not need to provide documented proof at this point.
- The lender draws up a soft credit: The lender will examine your credit report, including your payment history, and determine if you are a trustworthy borrower.
- Receive a pre-approval offer, if you qualify: If you are eligible for pre-approval, the lender will provide you with a personal loan offer, which will include the maximum loan amount they are willing to give, the interest rate, and all other loan terms. However, if you do not pass the smooth credit check, your application will be denied.
- Take a decision: You can either accept the pre-approval offer or decline it. Lenders differ on the length of a pre-approval, but it probably won’t last longer than a month.
- Provide documents: If you accept the offer, you will need to provide documents proving your income, employment and / or assets, as well as personal information such as your social security number.
The process of applying for pre-approval is fairly straightforward, but there are a few things to keep in mind when searching for and accepting a personal loan officer.
Compare the prices
Don’t go with the first lender who offers you pre-approval. Shop around and see what types of loans are available. We recommend that you seek personal loan pre-approvals from banks, credit unions, loan aggregators (like LendingTree), peer-to-peer lenders (like LendingClub), and specialty lenders (like SoFi). Cast a net as wide as possible.
There is no limit to the number of pre-approvals you can request. Because a pre-approval only requires a smooth credit check, your credit will not be affected by filing too many applications. “That’s the beauty of the pre-approval option,” says Alderete. “You can get a good idea of what [the personal loan] will look like without harming your credit.
Check the fine print and loan terms
Read the entire offer before accepting it. You want to make sure that the loan amount and the interest rate match your needs, but you also need to review other loan terms, such as the origination fee (one-time costs to process the loan, often between 1% and 10% of the loan amount) and prepayment penalties (fees charged to borrowers for prepayment of the loan). “You want to make sure you don’t have any of those penalties,” Patel says. “If you’re able to pay off your loan sooner or if you can invest a little more in your payment, you should be able to do it without being charged more. “
Let the pre-approval expire before accepting the offer
A pre-approval offer won’t last forever. You can’t get pre-approved for a personal loan and sit on the offer for several months. “You’ll have to make a decision pretty quickly, usually within a week or two,” Patel explains. Lenders know that the financial situation can change, which is why pre-approvals are usually short-term measures to assess the likelihood of you paying off your loan.
Withdraw more money than you need
People with good credit can get pre-approved for more money than they originally requested. However, just because you qualify for a larger loan doesn’t mean you should take it. “If my idea was to get a $ 5,000 personal loan for home repairs, I wouldn’t want to do anything about it,” Alderete says. “It’s something that people come across – they wanted $ 5,000 and they got approved for $ 10,000 and they’re going into more debt than expected.”