Taking out loans can be a convenient way for consumers to make large purchases such as homes, properties or vehicles. Consumers can also use them to pay off credit card debt or to fund higher learning, such as college or graduate school.
From 2017 to 2018, the total amount of outstanding personal loans in the U.S. increased from about $102 billion to $120 billion. To meet this growing demand, more banks, credit unions and financial institutions are entering into the personal loan industry. This gives consumers the option to shop around for the best interest rates from loan providers.
Unfortunately, many American adults aren’t aware of the variety of funding options available to them. Fifty-two percent of consumers don’t use the prequalification process to compare lenders for the best loan interest rates, and only 21 percent of consumers requested rates from three or more lenders before selecting the best option.
What’s the difference between prequalification and preapproval?
Though the prequalification and preapproval processes seem somewhat similar, they differ in a number of ways. The prequalification process takes a surface-level look at an individual’s basic information — the potential lender gathers data from a potential borrower to estimate how much of a loan they need and to assess their financial risk factor. This data is usually provided by the customers themselves.
The preapproval process is more in-depth. Lenders verify a person’s information using third-party sources. They may call a potential customer’s employer to verify their work history. They may also contact any of the three credit reporting bureaus to obtain one’s credit score. This procedure is often seen as a more reliable way to verify a borrower’s credibility.
Why get prequalified?
Before issuing a loan, the lender analyzes a borrower’s financial history to assess risk and reliability factors. Using this information, the lender determines the loan’s length, interest rate, total balance, and any additional fees. The prequalification process can vary from bank to bank but often includes the following steps:
- Decide which type of loan best fits your situation:
Are you looking for a mortgage, student loan or auto loan?
- Make a list of available lenders (credit unions, banks) from whom you’re interested in borrowing:
Take into account the available interest rates, past customer reviews and monthly payment options.
Apply for the loan:
This can be done online, in-person or over the phone. The lender will ask for your basic information, such as your full name, mailing address, income, credit score, the amount you’d like to borrow and employment information.
If you pass the prequalification process, your information will be reviewed more closely, kicking off the preapproval process. The lender will verify your personal data and assess your loan eligibility. They’ll examine your financial history using a soft or hard credit inquiry, check your employment, take a look at your rental history and more.
Some lenders will issue customers prequalification letters, which can be helpful if potential borrowers are shopping for homes. The document lets sellers know that the lender is tentatively willing to grant a certain amount of money to the buyer. Though this doesn’t guarantee that the bank or credit union will grant the buyer a loan, it tells sellers that potential buyers will likely have financing options. Some sellers require prequalification letters before even accepting offers.
What happens if you’re denied a loan?
Unfortunately, this can happen for a number of reasons. If the financial institution denies your loan request, here are a few steps you can take:
- Don’t be afraid to ask why:
Was there a specific reason your prequalification was denied? What can you do to improve your chances of prequalification?
- Take an honest look at your credit score and history:
A less than desirable credit score can hurt your chances of obtaining a loan. Check your history for any missed payments or negative marks.
- Look for ways to improve your credit:
Signing up for a secured credit card, setting a budget and making sure you pay each bill on time can increase your chances of securing a loan in the future.
- Consider other options:
Home equity line of credit (HELOC) loans can cover the costs of projects such as home repair, or credit card balance transfers can be a convenient way to pay off credit card debt. Additionally, consolidating student loans can help finance a lower interest rate.
USALLIANCE can help you navigate the prequalification process. Contact us today to learn about our interest rates and repayment plans.