When you need extra cash and your savings aren’t enough, then a personal loan may come handy. Compared to credit cards, personal loans may have cheaper interest rates and provide you more freedom to use the money anyway you see fit. However, if your credit isn’t in the best shape, it may be difficult to get approved for a personal loan, especially one with a low interest rate. Prequalifying for a personal loan gives you an idea of how much you might be able to borrow, which can be useful when making decisions about your finances. The prequalification process doesn’t lower your credit score, which is its biggest feature.
When you apply to prequalify for a loan, you get the chance to find out if you’re likely to be approved or not, and at what terms, without it hurting your credit. This means if you are turned down, or if you are prequalified but don’t feel happy with the terms offered, there’s no negative impact to you. It also means there’s no harm in getting prequalified by multiple lenders so you can compare your options and find the best deal.
Getting prequalified for a personal loan also gives you time to review the estimate and make sure you can really afford the monthly payment. Personal loans usually have fixed interest rates, so your payment would be the same each month. This predictability can be helpful, but you need to do the maths and ensure the monthly payments would fit into your budget before you commit. Some lenders offer various options, with different terms that change the monthly payment amount. You can take the time to figure out what works best for your wallet.
Keep in mind that your credit score plays a huge role in whether you can prequalify and ultimately get approved for a loan. It also impacts your loan’s terms—especially your interest rate. If you’re disappointed with the interest rates you receive in the prequalification process, and you’re not in a huge rush to get the loan, you could pause and spend some time working to improve your credit before you take out a loan. You can go through the prequalification process again later once your credit score increases, and you might receive better loan offers.