The difference between prequalification and preapproval depends on the kind of loan you are applying for and the lender. Some lenders also use the terms interchangeably, meaning they are referring to the same thing. In both cases, the lender does an initial check to determine if you qualify for any or either of them. If they decide to approve you for a preapproval or a prequalification, the lender will offer interest rates and terms based on the check.
Prequalification usually has a less rigorous check while a preapproval check requires borrowers to submit more personal information and finance records to get a personal loan. Hence, an offer made based on a prequalification may be less favorable as compared to a preapproval.
What does prequalification mean?
Prequalification means the lender has already done a basic assessment of the borrower’s creditworthiness to determine whether they qualify for a credit card or a loan. If you want to make sure you have a chance of qualifying before you apply for a loan, then prequalification is a good idea.
Different lenders will ask you to submit different documents and their qualifying criteria will always vary with different lenders. Most lenders will ask you to submit basic personal information such as your annual income, debt history, and savings if you have any. For some prequalification processes, lenders might check your credit report through a soft inquiry, so it won’t impact your credit score.
Once you have prequalified for a loan or credit card, you can choose to formally apply and go through the complete assessment process. The check may require you to submit official documents and agree to undergo a hard credit inquiry which will impact your credit score.
Getting prequalified doesn’t necessarily guarantee approval. But if you can apply for a prequalification with a soft inquiry or no inquiry, it’s a good idea. If your application gets rejected at this stage, you can move on to other options without damaging your credit score with a formal loan application.
What does pre-approval mean?
Getting preapproved can be a stronger indicator that you will get approved for a loan or credit card but it largely depends on the process. Some lenders use the terms prequalification and preapproval interchangeably and they mean the same thing.
Occasionally, you might also receive preapproval offers for credit cards or personal loans via emails, phone calls, or in the mail from lenders. These prescreened offers typically indicate that you appeared on some credit reporting bureau’s list of potential borrowers that meet the lender’s criteria and have been sent an offer of credit as a result.
If you decide to respond to the offers and apply, the lender must offer you the same terms they stated in their mailing. But those terms may also be specified in certain ranges rather than fixed estimates, so you won’t know the exact offer until you have applied and agreed to a hard inquiry. In rare cases, the lender may decide to reject your application once they have viewed your credit report and other personal information you provided during the application process.
Whether you applied for preapproval or received a prescreened offer, there’s still no guarantee that you will get approved, especially if things like your income, or credit history have changed recently after receiving the offer.
Conclusion
A pre-qualification is a good way to get an average estimate of how much you can get on a loan whereas a preapproval takes it one step ahead and gives you a more accurate number you could qualify for. However, it would be best if you were realistic about your expectations because there is no guarantee of securing the loan. Both are merely a chance. We hope this article helps you understand the difference between prequalification and preapproval.