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How to Get Pre-Approved for a Personal Loan in 4 Steps

Meta Description: The personal loan process is rather quick and painless these days. Here’s what you need to know.

Image source: Getty Images.


Promo: If you’re in the market for a personal loan, here’s the best approach to finding and getting approved for the right loan for you.

Personal lending is a relatively new way to borrow money, at least in its current form. Peer-to-peer lenders, up-and-coming FinTech companies, and many traditional financial institutions have all made personal loans to pay off debt and finance personal expenses more available and easier to get than ever before.

As part of the increased competition, most personal lenders allow you to pre-qualify for a loan, and also see what interest rate, loan terms, and maximum loan amount you might be able to qualify for. With that in mind, if you’re in the market for a personal loan, here are the steps you can take to get pre-approved for the best possible loan for you.

Step 1: Make a list of the personal lenders you’re interested in

Not all personal lenders will meet the needs of all borrowers. For example, if you’re looking to borrow $5,000 and the minimum loan offered by a particular lender is $10,000, it doesn’t really matter what interest rates and fees that lender charges -- it simply doesn’t meet your needs. With that in mind, check out our list of the best personal lenders, and keep these principles in mind:

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· Check each lender’s range of loan amounts. Some lenders will make loans for as little as $1,000, while others have minimums of $10,000 or more. On the other hand, some lenders cap their maximum personal loan size at $25,000 while others will loan as much as $100,000 to qualified borrowers. So, if you know how much you want to borrow, narrow down the list of potential lenders to those that have a lending range that makes sense.

· Some lenders only want borrowers with strong credit histories, while others are open to lending to subprime borrowers. So, if you have a shaky credit history, be sure to look at lenders that welcome borrowers like you. If you need to check your own credit score, there are several places you can do it. While it costs money to use, MyFICO.com™ is my personal favorite (I’ve been a customer for more than a decade).

· Also keep in mind that some lenders offer different loan term lengths. For example, Marcus by Goldman Sachs offers repayment terms of as long as 72 months, while SoFi offers loans with terms as long as 84 months.

Step 2: Check your rates, loan terms, and maximum loan amounts

The next step is to check the loan terms you can qualify for with all of the lenders on your list. At this point, you might be asking yourself, “Why so many?”

That’s because personal loan offers can vary dramatically between lenders -- even for the exact same borrower. When you apply for a mortgage or auto loan, the interest rates offered by different lenders are generally in the same ballpark. However, that’s typically not the case when it comes to personal loans. Remember that the personal loan industry is still relatively young, and therefore the underwriting methodologies used by various lenders aren’t exactly standardized. In fact, it’s not even uncommon for borrowers with strong credit histories to get interest rate offers where the difference between the highest and lowest is 8 or 9 percentage points.

But wait. Won’t all of these loan applications hurt your credit?

Not necessarily. The vast majority of personal lenders allow you to check your personalized loan offers without impacting your credit score. They perform what is known as a “soft inquiry,” which essentially means a credit check when you’re not actually applying for credit. This is similar in nature to the credit checks performed when credit card companies mail you pre-approved offers, or when you check your own credit. Most lenders clearly state that checking your rate won’t affect your score, so if you see this, go ahead and get pre-qualified. There’s really no reason not to do this for every lender on your list.

Step 3: Narrow down your search to the best offers

After you’ve viewed your personalized loan offers from several lenders, it’s time to figure out which is the best one for you. If any of the offers have extremely high-interest rates compared to the others, go ahead and scratch them off your list.

Other than comparing interest rates, here are some things to consider in this phase of the loan selection process:

· What origination fee does the lender charge, if any? Many lenders don’t have any fees. Others charge an origination fee when you obtain a loan. For example, LendingClub charges a one-time origination fee that ranges from 1%-6% of your loan amount. However, if a lender that charges a fee offers you a significantly lower interest rate than a no-fee lender, it could be the better deal in certain cases. Lenders with fees will generally give you two numbers -- the interest rate and the APR of your loan. The APR is the number that is inclusive of origination fees, and therefore is a good apples-to-apples way to compare fee and no-fee lenders.

· Is the lender offering a loan size that makes sense? Just because a personal lender offers loans that are the size you need doesn’t mean that you’ll qualify for a loan of that size. For example, SoFi makes personal loans of as much as $100,000, but your credit, income, and other debts need to justify your loan’s size.

· Is the lender offering you a term length and monthly payment that makes sense for you? Finally, even if a lender offers you a rock-bottom interest rate and has no fees, make sure that the offer applies to a loan with a long-enough term. For example, Freedom Plus offers personal loans with APRs as low as 4.99% as of this writing, which is the lowest I’ve seen by a considerable margin. However, to get such a low rate, an excellent-credit borrower would need to agree to a loan term of just 24 months. This could result in an unmanageably large monthly payment for many borrowers, so it’s important to take things like loan length and monthly payment into consideration.

Step 4: Choose your personal loan and get ready to apply

Once you’ve compared your offers and have determined the best personal loan for you, it’s time to complete the application process. At this point, you’ll need to fill out a more thorough form of your personal information, and will likely be asked to upload supporting documentation for your loan. Just to be sure you’re prepared, here’s what you should have available:

· Your driver’s license, other state-issued ID, or U.S. passport.

· Your Social Security card.

· Proof of your income. If you’re an employee, your last few pay stubs and the last two years of W-2s should be sufficient. If you’re self-employed, a few months’ worth of bank account statements documenting your income and a couple years’ worth of 1099s are likely to be enough.

· Your bank account number and routing number where you want the lender to deposit your loan proceeds. Many lenders also offer an auto-pay discount, so you’ll need this information for that as well.

· Some lenders may also want to see tax returns as well.

This is by no means an exhaustive list, and some lenders may ask for other supporting documents. Sometimes, there are several rounds of document requests you’ll have to deal with before the loan can be finalized -- this is especially true if you’re self-employed. Don’t get frustrated, this is a normal component of the underwriting process.

It’s important to note that at this point, your loan application will most likely result in a hard credit pull. In other words, when you actually apply for one of the loans you pre-qualified for in step two, it could potentially affect your credit score. It’s true that hard credit inquiries are a FICO® credit scoring factor, but it’s unlikely that a single inquiry will drop your score by more than a few points.

To sum it up, applying for a personal loan has become far easier than it has been in the past. Unless you have an unusually complex financial situation, you should be able to thoroughly complete the personal loan comparison and application process in its entirety within a couple of hours (although it may take a few days before you get your money).

The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule. If we wouldn’t recommend an offer to a close family member, we wouldn’t recommend it on The Ascent either. Our number one goal is helping people find the best offers to improve their finances. That is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.