When shopping for a loan online, you may see the term “prequalification” come up often. Banks, online lenders, and credit unions may invite you to prequalify for some of their products, such as personal loans, to help you understand your eligibility. But what exactly is prequalification, and can it impact your credit? Read on to learn more.
What is Prequalification?
Prequalification is a credit estimate a lender provides based on a borrower’s financial information. Typically, the lender conducts a soft credit inquiry to evaluate your eligibility. Based on your information and the soft credit check, the lender can provide you with details like how much you may be able to borrow and what interest rates you can expect based on your credit.
Here are a few things to keep in mind about prequalification:
- Prequalifying does not mean you’ve applied for credit. You’ll still need to submit a formal application for your loan.
- Prequalification is not a guarantee of approval. Your application may still be rejected based on unforeseen factors even if the lender informed you that you’ve prequalified.
- Prequalification helps you rule out loans you’re not eligible for. Being rejected for prequalification helps you understand which loan products you won’t qualify for. It’s unlikely that you’ll be approved for a loan if you get rejected for prequalification, so you can use this tool to filter out options that don’t work for you.
Does Prequalification Affect Your Credit?
Getting prequalified won’t impact your credit. When lenders evaluate your details for prequalification, they perform a soft credit check. Soft credit checks give lenders the information they initially need without affecting the potential borrower’s credit.
While prequalification doesn’t adversely impact your credit score, the actual loan application process involves a hard credit inquiry. This is a comprehensive check performed by lenders to understand your creditworthiness better. Hard inquiries appear on your credit report and can temporarily knock a few points off your score. Keep in mind that multiple hard inquiries in a short span can cause a bigger dip in your credit score. So, borrowers should be conscious of how many loan applications they submit, and should only apply for a personal loan when they are confident about a particular lender.
How to Prequalify for a Personal Loan
Lenders each have their own prequalification process. For instance, some may offer prequalification as part of a promotional campaign, while others may offer it to existing customers. Many lenders let you fill out a form on their website and inform you about your prequalification status upon submission. Filling out this form may only take a few minutes, and it can help you make a more informed decision when comparing loans and rates.
The Bottom Line
When you’re evaluating different lenders and considering personal loans, prequalification can be a useful tool to understand your eligibility and options. It won’t lower your credit score and may not even appear on your credit report. Get prequalified to see what loans you may qualify for and gain insight into potential loan terms.
