Many people get a regular flow of snail mail, email, online ads, and other notifications saying that they’ve been pre-qualified for a personal loan or a credit card.

What do these ads actually mean? Does loan pre-qualification mean that a loan is guaranteed? Is a certain loan amount a sure thing? Is an advertised interest rate locked in? How do you take advantage of this kind of offer? Is it too good to be true?

The short answer is proceed with caution and don’t start spending quite yet. Pre-qualifying for a loan may be good news, but it’s no guarantee of receiving, or having access to, a loan. Read on to learn all the ins and outs of what it means to pre-qualify for a personal loan.

What is pre-qualification for a personal loan?

Pre-qualification for a personal loan simply means that a lender believes you might qualify for a loan based on an initial review of your basic financial information. It does not involve a commitment to make a loan on the lender’s part or any obligation to take a loan on your part.

Instead, pre-qualification is a first step in exploring whether a loan could be a good fit for both the lender and the borrower. Obtaining pre-qualification for a loan involves providing basic financial information to a potential lender. This could include information about your annual income, monthly net income, and monthly gross income. The lender will also look at your debts, debt-to-income ratio, and desired loan amount. The pre-qualification form may also ask other questions about your financial situation. At this stage, you generally don’t need to provide any documentation. Your best guess is usually good enough, but you should try to be as accurate as possible.

During the pre-qualification process a lender may also perform a soft credit check. This type of credit check, also called a soft pull, doesn’t impact your credit score because it’s not tied to a specific inquiry. Instead, you provide permission for a lender to review your credit. However, the potential lender will be able to review your credit report, credit history, and credit score.

Because soft inquiries don’t impact your credit score, some people could be pre-qualified by multiple lenders. When you’re pre-qualified by multiple lenders, it means that—once you are ready to borrow—you’ll be poised to take advantage of different loan options.

Just the beginning

Once the lender has all of this information, they’ll look at all of the information together and use it to make a determination about whether you pre-qualify for a loan. As part of the process, you’ll receive an estimate of how much you may be pre-approved to borrow for a new loan based on an estimated interest rate and other terms. You’ll also receive an estimate of your monthly payments.

Keep in mind, being pre-qualified doesn’t mean that you’re actually approved for a loan. It only means that your approval odds are very good. At this stage, the lender can still change the terms. This is not unusual, because interest rates fluctuate daily, and your rate isn’t locked in until you sign on the dotted line. A lender might also change any one of their policies in the interim.

When you formally apply for a loan, the lender will ask for documentation regarding the information you provided. If anything doesn’t add up, your pre-qualification probably won’t turn into an approved loan.  Moreover, if your financial situation changes because you lose your job, incur debt, or get a raise, the terms could change (for better or worse).

The lender will also perform a hard inquiry into your credit and pull a more recent credit report to make sure there are no changes. Because of this, think about pre-qualification for a personal loan as part of the information-gathering stage.

What is the point of getting pre-qualified for a personal loan?

While it’s true that pre-qualification doesn’t guarantee that you’ll receive approval for a loan, there are several good reasons to seek it.

  • It has no effect on credit score, so becoming pre-qualified has little risk.
  • Pre-qualification (or pre-approval) for a loan may be required as a condition for certain purchases, like real estate.
  • If you have a low credit score, you can determine if a loan from a traditional bank is a possibility.
  • It can give you an idea of the loan terms and rates you may be able to obtain.
  • It prompts lenders to give you an idea of monthly payment amounts.
  • You can pre-qualify with different lenders to compare loan amounts, interest rates, and terms.

How does the pre-qualification process work?

Pre-qualification for personal loans is usually a fast process. If you provide all the information and fill out the loan form completely, you should expect a response in one to three days. Many traditional banks, credit unions, other financial institutions, and websites have simple loan applications that ask for your best guess regarding yearly or monthly income and the total loan amount you’re seeking. Some websites will even give you quotes from multiple lenders based on a single application.

Once you’re pre-qualified, you’ll be in a good position to decide whether you’d like to move forward. If you obtained pre-approval from multiple financial institutions, you’ll be able to choose a lender by comparing interest rates, loan terms, and the maximum loan amounts.

Once you’ve chosen a lender, you’ll then need to formally apply for loan approval. This will likely involve a credit review and a hard credit inquiry that will appear on your credit report. You may also be asked to provide documentation relating to proof of income, such as recent pay stubs or a W-2.

Being pre-qualified for a loan (or more than one loan) can help you make a wise choice when it comes to borrowing. Just remember, it’s only the beginning of the process. Be as accurate as possible when completing pre-qualification forms, do your research, and make an informed decision when you go to apply.