Pre-approval is often associated with mortgage loans, auto loans, and other financing products that involve a larger amount. It gives you a price range on how much house, car, etc you can shop. With personal loans, the idea of getting pre-approved might be novel and the process not exactly necessary. If you plan to apply for a personal loan, the most preliminary step is likely a prequalification. It doesn’t require you to submit a loan application, which you can prepare for early on.
Preapproval or Prequalification
When you opt to get prequalified, the lender will size up your qualification based on the information you’ve given on your income, assets, and debts. Some lenders on their online prequalification forms might ask for an estimated credit score, the amount to be borrowed, the purpose of the loan, etc.
The goal of a prequalification is for you to get an idea on how much you can possibly borrow if you apply for a loan. It’s a simpler, less involved process compared to preapproval where the lender would pull up your credit report, income, assets and others hinged on your submission of a completed loan application.
Because it can get tedious and deep, preapproval is more prevalent among loans that involve larger sums and thus a higher level of scrutiny on the borrower’s ability to repay. This explains why personal loans with their relatively small loan size are not usually subjected to preapproval.
Preparing for Your Personal Loan
Prequalifying is definitely easier than preapproval and you can use the results to see what you’re likely going to get so far. But it’s not the same as getting approved; you will need to meet the lender’s requirements to secure your personal loan funds for your wedding, vacation, etc.
- Documentation. It’s very important to have the necessary documents ready before you hand in your application form. Lenders will likely require information about your personal background, income/work-related history, and your loan details. In the course of your application, they could ask you to produce this or that document for verification.
- Credit. Ideally, you have maintained a good credit score prior to seeking a loan. This means not incurring any unnecessary debt, paying your credit card bills on time and avoiding anything that could lower it further or tarnish your credit report months before. A good credit score is your leverage to negotiating better terms or a lower rate for your personal loan.
- Amount. You have your debt-to-income ratio to help you determine how much in new personal loan debt you can comfortably take on. Don’t borrow more than you need or you’ll be saddled with more interest costs.
It’s up to you to get prequalified or preapproved for that matter. Always shop for rates and terms before you sign up for a personal loan.