There are many reasons why someone would want to take out a personal loan. From weddings to medical bills to a dream family vacation … lenders see it all. But one of the most common situations in which consumers are likely to look for loans with favorable terms is to pay off debt and repair or improve their credit score.

How loans work

Personal loans for debt consolidation work when the borrower initiates a new lending contract with a lender in order to pay off their existing debt. In some cases, this can help to improve their credit score, as it can help them get out of collections, and speed up the repayment process with, in some cases, better terms and lower interest rates. 

A good idea when considering taking out a personal loan to improve your credit score is verifying whether you prequalify. This will save you time and will avoid sending a full application that may or may not get approved.

What does it mean to prequalify for a loan?

Experian, one of the three main credit bureau agencies in the United States, explains on their website that being “pre-qualified” is when you agree to provide your credit information to a lender in order to shop for credit offers, such as a credit card or loan. However, this does not mean that you are preapproved* or approved for a loan.

*Being preapproved is when a lender independently determines that you meet the requirements for credit and sends you an offer. If you’re pre-approved, you can decide whether you want to formally apply for and ultimately accept an offer — if extended — of the loan or credit card from the lender or creditor.

Finding out if you prequalify for a loan with a particular lender is a great way for you to get a preview of what kind of loan, terms and interest rates you will receive.

The four easy steps you need to follow

This NerdWallet blog post explains that there are four easy steps to follow during the pre-qualification process:

1. Because pre-qualification is an action started by the consumer, it is your job to apply with the lender you’re interested in.
2. Once you submit the first part of the application, the lender will perform a soft credit pull, assessing your credit score and financial history. Not sure about the difference between soft and hard credit pulls? A soft credit pull often involves a third party checking your credit score in order to make a decision without affecting your score, whereas a hard pull or inquiry will usually impact your credit score and stay on your credit reports for about two years. Click here for one of our articles on soft and hard inquiries and other actions that affect your credit score.
3. After the potential lender reviews your credit history, they’ll decide whether you are approved for the loan you requested. Keep in mind that this is all based on your existing debt, debt-to-income ratio, credit score, credit card balances, etc. Your credit score can, and often does, vary over time, even in a short span of time.
4. If the lender decides to approve your request, you can choose to move forward with a formal application that will often require additional information. 

I didn’t pre-qualify, now what?

Even though this can be discouraging, it’s important to remember that just because one lender didn’t approve your request for pre-qualification, this doesn’t mean that another one won’t. However, at this point, it might be a good idea for you to talk to a financial professional who can help you evaluate your current credit stories.

In order to easily get loans, keep in mind that your credit score is the main indicator for lenders on whether you’ll pay back on time and follow the agreed upon terms. If you’re struggling to increase your credit score, here are a few steps you could follow, according to Experian.