Pre Qualify for a Personal Loan
You may have received promotional material in the mail stating that you have pre-qualified for a personal loan. Your email inbox may have received such emails from banks and financial institutions. Sometimes, people get text messages stating that they can borrow a certain amount and that they have pre-qualified for such a loan. So, what exactly does it mean to pre-qualify? Is it just a marketing trick or is there some deeper meaning behind the whole thing? And what is the concept of pre-qualification? To answer these questions, let us first understand pre-qualification.
What is pre-qualification for a personal loan?
borrower is looking to raise money (via a loan), it basically signals to the credit bureaus that the borrower does not have enough cash on hand to take care of whatever expense is being met using the loan. Further, by borrowing a loan, the borrower is risking the fact that he/she may not be able to repay the loan. In most cases, borrowers will end up paying back the loan, but nothing is guaranteed. There is always that risk of default. Risk is not something that is viewed positively in the credit reporting world and hence the credit score goes down slightly.
Now imagine if multiple financial institutions performed such “hard checks” on a person’s credit file because he/she applied to multiple institutions hoping to get the best loan possible. The credit score downgrades will start to accumulate and the borrower may see a hefty drop in the credit score. The tragedy of it all is that at the end of the day, if the loan does not get approved, the borrower is left with a lower credit score and no money! So this traditional method of evaluating a borrower’s credit profile has some undesirable risks associated with it.
Enter pre-qualification. Financial institutions now have a way of conducting a preliminary evaluation of a borrower’s credit profile by just using basic personal information and some financial details. The institutions use this preliminary information and conduct what is known as a “soft check” on the credit file. This soft check gives them a basic understanding of whether the borrower has a good chance of getting loan approval. If that is the case, further information is sent to the borrower on making a full detailed application. On the other hand, if the preliminary evaluation throws up some negatives, then a loan is turned down and it saves the time (and risk of credit score downgrade) to go through a full evaluation.
The good thing about a soft credit check is that it does not impact the borrower’s credit score. So, pre-qualification is really useful from the borrower’s perspective. The lender gets to know whether the inquiry has a potential for success and the borrower know what chance he/she has to actually get approved for a personal loan.
Why else should a borrower go for pre-qualification?
It is recommended that a borrower opts for pre-qualification when applying for a personal loan because it gives him/her the chance to compare offers. Since a pre-qualification process does not hurt credit scores, it can be performed multiple times by multiple institutions. The main benefit that a borrower derives by applying to multiple institutions for pre-qualification is that different loan offers and terms can be compared.
Remember that getting pre-qualified for a loan does not mean that you are guaranteed a final approval. After pre-qualification, the financial institution processing your file has access to additional information which can change their opinion about your creditworthiness. So, there is always a chance of the loan approval falling through in the later phase of the process.
However, comparing offers make sense because you can eliminate the ones that you know for sure you will not select. Then, you can focus on the best few ones and let them perform a hard check on your credit file. You save yourself from more hard checks that are really necessary.
What are the exact steps in a pre-qualification process?
To get started with a loan pre-qualification process, you have to fill out a form online or via mail. Normally, loan companies have a form for pre-qualification on their websites, so you simply need to search for it online.
Sometimes, you already get notifications for pre-qualification without having to apply. These are email or regular mails sent to you by financial institutions stating that you can apply for a loan. Sometimes, these are genuine while other times, they are simply an invitation for you to apply for the pre-qualification as mentioned in the step above. Companies like to send something like a “special code” or “special offer” that basically nudges you towards going online and applying for pre-qualification.
Once at the pre-qualification application page, you will have to fill out your personal information like name, contact information, employment details, citizenship information, your income, etc.
The financial institution then checks all of that information and also looks at things like your existing loans and debt servicing ability in order to decide whether you are a good candidate for lending. The pre-qualification evaluation is quite fast and you can expect a decision in 30 minutes to a few hours. In many cases, companies get back to you within minutes. The reason for such a quick turnaround could be an algorithm based evaluation.
Once you get the pre-qualification, you will be directed to proceed with a more detailed application.
What if I get rejected in the pre-qualification process?
If you get rejected during the pre-qualification process, you will probably simply get a notification that you have been turned down. There is nothing more you can do in such a case. Hence, we recommend that you apply to multiple financial institutions for pre-qualified loans. You never know who will accept your request and who will reject it. If for some reason you cannot get pre-qualified for a personal loan at any of the institutions where you applied, then look for other ways to raise cash, via auto loans or payday loans.
What if I get rejected in the final approval despite being pre-qualified first?
It is entirely possible that even after getting pre-qualified for a personal loan, you could still get rejected for the final approval. After all, pre-qualification is not a guarantee for a personal loan. It is simply a preliminary affirmation to proceed with a full application. If you do get rejected for final approval, then you will most probably receive a notice stating so. This notice is known as an “adverse action notice”.
Even though the name sounds scary, it is nothing to be worried about. It is just a legal jargon for communication which says that the financial institution could not approve you for a loan. The reason for getting rejected could be low income, something negative on your credit report, or some new piece of information which came into the picture after the soft credit check. Remember that in the pre-qualification process, the lender had limited information to evaluate. New information is looked at once you make a full application and a hard credit check is performed.
The adverse action notice is normally delivered by the lender to you via phone, in writing, or in person (rare cases). The adverse action notice will include information the credit agency that issued your credit report, the details as to why you were turned down, your credit score, and any other relevant information. You will also see directions on how you can order a free copy of your credit report.
If I apply for a pre-qualified personal loan on your website, how secure is my data?
Data privacy and security are issues that we take very seriously. As a matter of policy, we do not share or sell any personal data for marketing purposes. All we do is connect you to our network of lenders who offer pre-qualification for personal loans. In order for these lenders to take a call on whether you pre-qualify or not, they need the basic information which you fill out on our website. We have to share that information with them only for the purpose of credit evaluation. We follow best practices and industry guidelines on this issue. So, you can be sure and take comfort in the fact that we are responsible in the way we handle data of all our customers.
Is there any difference between the terms pre-approval and pre-qualification?
Pre-qualification and pre-approval are terms that are used quite commonly when speaking about loans. Different lenders tend to use either of those terms. In reality, there is not any major difference between the two. They essentially mean the same thing, that is to get a preliminary approval and recommendation to make a full application. Both pre-approval and pre-qualification processes involve a soft check on your credit file. Pre-approval usually is used more in cases involving credit cards or large and long-term mortgages, while pre-qualification is used mostly in cases involving shorter term personal loans.
Where to find personal loans?
You are encouraged to visit our section on personal loans. There, you will find a form that you can fill out. We will then forward that information to our network of lenders and get the best loan offers for you, assuming that you pre-qualify. It is a great tool for you to evaluate whether you are able to pre-qualify and what sort of terms and conditions you are being offered.
Besides our website, there are some institutions where you can apply for personal loans as well. Some of them are:
- SoFi – SoFi is a California based company that specializes in online lending and personal finance. They offer pre-qualification on personal loans as well. They are known to provide some of the lowest interest rates in the country. They are also very much recommended for young professionals who have a decent paying job and have recently graduated.
- Marcus by Goldman Sachs – Marcus is an online bank of the financial major Goldman Sachs. They offer a completely online experience with personal loans. All your documents will also be submitted via the computer. They are also known for their zero loan origination fee.
- BestEgg – BestEgg is a personal finance company that offers pre-qualified personal loans. They are well-known for their fast online application process. So, if you want to see quick results, BestEgg is a good choice.
- Prosper – Prosper is an innovative personal finance company based out of California. It offers peer-to-peer lending, where investors choose whether to lend to you or not. All you have to do is apply for a pre-qualification and list your loan requirement on the marketplace. It is like the Craigslist of loans. Your loan may not necessarily come from one particular lender but rather from a group of lenders. The unique thing about a marketplace model is that a borrower who gets rejected by a bank or a traditional institution has a chance of getting a loan from an investor.