Applying for pre-approval is a crucial step to getting a personal loan. And although it might seem like splitting hairs, it is different from getting formally approved.
Pre-approval allows you to shop around at different lenders without dinging your credit score, and it’s not a guarantee that you’ll 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 to getting a personal loan approval. “It’s good to go through a pre-approval process first, just to know where you stand,” says Trina Patel, financial advice manager at Albert, a money-management app.
When shopping around for loan options and applying for pre-approval, lenders will perform a soft credit check, which doesn’t affect your credit. But when you formally apply for a loan, that results in a hard credit pull, which does — and can remain on your credit report for up to two years.
Getting a pre-approval is — and should always be — free. During the pre-approval process, lenders will review your credit history, income, and other assets. Their aim is “to assess how likely you’re able to repay the loan,” Patel says.
If you qualify for a pre-approval, the lender will send you an offer letter with a loan amount, rate, and other terms. If you want to accept the offer, you would need to go through the formal application process, which requires providing documentation, such as pay stubs, ID, and your Social Security number.
Before accepting a personal loan offer, think about what you can comfortably afford to make in payments each month. Don’t take on any new debt without figuring out if your budget can accommodate it and if you can pay it off in a reasonable amount of time.
Keep in mind that a pre-approval isn’t a promise. “It doesn’t guarantee you’ll be approved,” says Tara Alderete, director of enterprise learning at Money Management International, a nonprofit financial counseling and education agency. “If you obtain a pre-approval and something changes [to your income or credit report], you can still be denied for that loan,” says Alderete.
How to Apply For Pre-Approval
Generally, here is the process of applying for a personal loan pre-approval.
- Fill out the form for pre-approval on a lender’s website: You’ll be asked about your income, employment, and debt, but you won’t need to provide documented proof at this point.
- The lender performs a soft credit pull: The lender will be looking at your credit report — including your payment history — and sussing out whether you’re a trustworthy borrower.
- Receive a pre-approval offer, if you qualify: If you qualify for a pre-approval, the lender will extend a personal loan offer, which will include the maximum loan amount it’s willing to extend, the interest rate, and all other loan terms. However, if you don’t pass the soft credit check, your application will be denied.
- Make a decision: You can either accept the pre-approval offer or deny it. Lenders differ on how long a pre-approval lasts, but it likely won’t last longer than a month.
- Provide documentation: If you accept the offer, you’ll need to provide documents that prove your income, employment and/or assets, as well as personal information like your Social Security number.
The process to apply for a pre-approval is pretty straightforward, but there are some things you need to keep in mind when browsing for and accepting a personal loan officer.
Don’t go with the first lender that offers you pre-approval. Shop around and see what kinds of loans are out there. We recommend applying for personal loan pre-approvals from banks, credit unions, lending aggregators (like LendingTree), peer-to-peer lenders (like LendingClub), and specialized lenders (like SoFi). Cast as wide of a net as you can.
There’s no limit to the number of pre-approvals you can apply for. Because a pre-approval requires only a soft credit check, your credit won’t be affected by putting in too many applications. “That’s the beauty of the pre-approval option,” Alderete says. “You can get a good idea of what [the personal loan] will look like without hurting your credit.”
Check the Fine Print and Loan Terms
Read the offer fully before accepting it. You want to make sure the loan amount and interest rate are what you need — but you also need to review other terms of the loan, such as origination fees (one-time costs to process the loan, often between 1% and 10% of the loan amount) and prepayment penalties (a fee charged to borrowers for paying off the loan early). “You want to make sure you don’t have any of those penalties,” Patel says. “If you are able to pay off your loan earlier or can put a bit more toward your payment, then you should be able to do that without being charged more.”
Let the pre-approval expire before you accept the offer
A pre-approval offer won’t last forever. You can’t apply for pre-approval for a personal loan and sit on the offer for several months. “You’ll need to make a decision fairly quickly, typically within a week or two,” Patel says. Lenders know that financial situations can change, so pre-approvals tend to be short-term measures to gauge the likelihood of you paying back your loan.
Take out more money than you need
People with strong credit may get pre-approved for more money than they originally asked for. However, just because you qualify for a larger loan amount, it doesn’t mean you should accept it. “If my idea was to get a personal loan for $5,000 for a home repair, I wouldn’t want to do anything over that,” Alderete says. “That’s one thing people run into — they wanted $5,000 and they were approved for $10,000 and they get themselves into more debt than they planned.”