How personal loan pre-approval works

Chances are you’ve heard the term pre-approval before, but it often only comes up when talking about mortgages. You might not have seen it attached to personal loans, but receiving personal loan pre-approval is a vital part of the application process.

What is personal loan pre-approval?

When you complete an application for a personal loan by providing your basic information such as your name, birth date and employment details, the lender uses this information and its own technology to determine whether it can approve you for a loan. It will usually do a soft credit check, which does not impact your score, to review your finances on a surface level. If your finances look acceptable to the lender, it will give you pre-approval. Online lenders can give fast pre-approval, sometimes within minutes of submitting your application.

Personal loan pre-approval simply means the lender might approve you based on what it has seen so far. At this point, it can give you a quote for a pre-approved loan, but it does not mean you are guaranteed the loan.

Keep in mind that when you apply, some lenders will only do a soft credit check to give pre-approval, but not all – some may go straight to the hard credit check, so be sure to apply selectively if you’re worried about your credit score taking a dip.

Next step: Approval

If you like the lender’s loan offer, you can proceed with the rest of the application process towards official approval. At this point, the lender who did a soft credit check first will now do a hard credit check. It will verify all the information you’ve provided and do a more in-depth review of your finances. If all looks good to the lender and there are no surprises, it will give its final approval.

How the pre-approval process works online

1. Fill out the preliminary loan application with your basic personal information. Be sure everything is accurate.
2. Submit your application.
3. Wait while the lender reviews your application. The lender may reach out to confirm your information.
4. Receive your pre-approval decision. Pre-approval is usually quick, sometimes within minutes of submitting your application.
5. Proceed with the pre-approved loan and provide more information if required. The lender may take a day or two to fully evaluate your application.
6. Receive official approval. Review the contract carefully.
7. Sign the contract and receive your funds.

Are there pre-approved personal loans for bad credit?

Yes, it is possible to get personal loan pre-approval with bad credit. There are many online lenders who specialize in providing personal loans to borrowers with bad credit. But as mentioned above, getting pre-approved doesn’t guarantee official approval. The lender can deny your application if it discovers information about you that doesn’t meet its lending criteria. You can increase your changes of approval by providing accurate information from the start and reviewing the lender’s eligibility requirements before applying.

You may also want to consider a cosigner. A cosigner is a close friend or family member who agrees to sign the loan with you. By signing the loan, they agree to cover your loan repayments if you default on them. But keep in mind that their credit score will also take a hit if you don’t make your payments.

How might a pre-approved loan benefit me?

You can benefit in the following ways:

• If you seek out personal loan pre-approval, it can help you feel more confident when making a decision between different loans.
• You’ll know that a lender is likely to lend you the funds you need, and you’ll have an estimate of how much the loan will cost.
• Choosing the right loan can be difficult, but knowing your potential interest rate and the fees attached to the loan can help you make the right choice for your financial situation.

What do I need to submit for personal loan pre-approval?

If you’re ready to submit an application, be prepared to share some personal information with the lender.

• Your name and date of birth
• Your contact details, including your address, phone number and email
• Your employment details, including your current employer and income
• Your financial details, including your expenses and debts

Lenders provide pre-approvals based on your application. If it’s inaccurate or missing details, a lender won’t be able to offer you pre-approval. Be sure to take the time to gather the necessary documents so that your application is as accurate as possible before you begin.

How can I avoid being denied for a pre-approved loan?

Lenders may decline your application for a pre-approved loan for any reason. Some common reasons include:

• You haven’t supplied the proper documents for validating your income.
• Your job situation changed.
• Your income changed.
• You’ve taken on more debts since pre-approval.
• You have too many inquiries on your credit report.
• You have a long track record of not paying your debts.

Unfortunately, there’s no way to avoid loan rejection aside from making sure your application is accurate and reflects your ability to repay the loan. You can work on building your credit score if it’s low or pay down some other debts if your debt-to-income ratio is too high to meet a lender’s qualifications.

What to watch out for

Some common things to watch out for when looking for pre-approval include:

• Always be wary of a lender’s reputation. Check customer reviews and the lender’s website, and never agree to a pre-approved loan from a lender that you don’t trust. There are many scams out there that look legitimate, especially in the online world. Learn more about personal loan scams.
• Some disreputable lenders will send postcards in the mail or forward an email that mimics a real lender. Confirm that these pre-approval offers are real before proceeding with a loan application.

Find out if that pre-approved loan offer you received is legit

How do lenders identify customers to offer pre-approved loans to?

Banks and lenders possess quite a bit of information about their customers and will use this knowledge to promote various products. They make this decision based off your credit score and the personal information you’ve supplied to other lenders.

When you complete an online application, most lenders will perform a soft pull on your credit and run your application through an automated underwriting program. This allows them to quickly gauge your ability to afford a loan, which they then use to offer loan pre-approval or deny your application.

Is there a difference between conditional approval and pre-approval?

Both terms are used often and may be confusing for people unfamiliar with the industry jargon.

Pre-approval is a quick scan of your application to confirm your credit score, income and personal details align with the lender’s qualification criteria.

Conditional approval is given to applicants who may have to supply extra information to the lender. Paycheques, bills and employment records may be required. It means that the lender is likely going to approve your loan, but still needs to gather specific information for its underwriting team.

Some personal loan lenders will use the terms interchangeably. If you’re still confused after receiving pre-approval or conditional approval, don’t hesitate to contact your lender and ask questions.

Bottom line

Personal loan pre-approval can help you make a more informed decision about your finances in the near future, but it can be a confusing process if you don’t know what to look out for. Remember that a pre-approved loan offer doesn’t guarantee you a loan and that lenders will likely consider both your credit score and your income before extending pre-approval.

You can compare your personal loan options to find the right lender before you submit an application. Make sure you meet the eligibility requirements and have the necessary documents on hand in order to speed up the application process.

Frequently asked questions

• How much can I borrow with a personal loan?

  Maximum loan amounts vary between lenders. You can usually borrow anywhere from $1,000 to $50,000, but sometimes amounts can be higher or lower.

• Should I bother with personal loan pre-approval if I have excellent credit?

  It depends on how ready you are to make a purchase or use your personal loan funds. If you’re just testing the waters and want to compare how much different lenders would be willing to lend you, getting pre-approved makes sense. If you need to borrow quickly and are confident in the rates you’ll receive, you might want to apply for the loan right away – after comparing lenders of course.

• What's the difference between personal loan pre-approval and prequalification?

  Prequalification is a preliminary process that determines if you meet the lender’s minimum eligibility criteria. Pre-approval is a more involved process that evaluates your creditworthiness, among other factors, to determine how much you may be able to borrow from the lender.

Written by

Leanne Escobal

Publisher

Leanne Escobal is a publisher for Finder. She has spent over 11 years working with financial products and services, specializing in content and marketing. Leanne has completed the Canadian securities course (CSC®) as well as the personal lending and mortgages course by the Canadian Securities Institute. She has a Bachelor of Arts (Honours) in English literature and creative writing from Western University. See full bio