When it comes to taking out a loan, there are two terms that you’ll likely hear a lot: prequalified and preapproved.
If you’re in the market for a loan, you might wonder what the difference is between the two. Both terms refer to the process of appraisal by a lender, but there are some key distinctions that you should be aware of.
What Does It Mean To Be Prequalified?
Getting prequalified means you’ll undergo a prequalification process, which involves a basic assessment of your creditworthiness by the lender. This process can help determine if you qualify for a credit card or a loan. Borrowers undergo this process when they opt to present an application for prequalification before submitting the final loan or credit card application.
The requirements needed for the prequalification process tend to vary by lender. However, it is vital to know that it might involve sharing basic information concerning your finances, such as your income, savings, and expenses. For example, online lenders, like CreditNinja, will require you to undergo a soft credit inquiry, which doesn’t affect your credit score.
After getting prequalified, you have the option to proceed to the actual loan application and undergo a more rigorous review process. This usually involves submitting more necessary documents that a lender may require and a hard credit inquiry.
It’s crucial to remember that getting prequalified will not give an assurance of credit approval. However, you are free to get prequalified without hurting your credit score. This is generally an excellent way to get a good glimpse of what to expect if you apply for a loan or a credit card.
What About Preapproved?
Most of the time, lenders use prequalification and preapproval interchangeably. However, it’s vital to know that preapproval usually involves a more detailed process. The borrower will be required to complete an official credit application to get preapproved and provide the lender with the necessary documents to carry out an extensive credit and financial background check.
It’s vital to know that the preapproval process usually gives you a better idea of the interest rate that the lender may charge. In addition, some lenders tend to let the borrowers opt to lock in an interest rate or let them pay an application fee for the preapproval process.
Once the preapproval process is completed, the lender can provide you with the exact loan amount with the interest rate and terms information. This is different from prequalification, which only gives you an estimate.
The Differences Between The Two
Although lenders use prequalification and preapproval interchangeably, they still have a few differences. These differences are highlighted in the table below:
|Formal Application and Credit Check||It doesn’t require one, but might require a soft credit inquiry, depending on the lender.||It requires both a formal application and a credit check.|
|Loan Amount||It provides you with loan amount estimates based on your eligibility.||It provides conditional loan amount approval.|
|Process||It has a quick process.||It could take a couple of days.|
How Do Both Impact Your Credit Score?
When applying for a personal loan and credit card, prequalification and preapproval only undergo a soft credit inquiry. Therefore, your credit score will not suffer from losing a few numbers. However, auto loans and mortgages are different since they may lead to hard inquiry, negatively impacting your credit score.
Why Are Both Important?
As mentioned earlier, getting prequalified or preapproved doesn’t necessarily mean approval, so why should you bother?
It’s essential to know that both processes have several benefits. For one, they inform lenders that you’re a potential client, which is key in a competitive market. Other benefits of getting prequalified or preapproved include the following:
- Knowledge of How Much You Might Borrow
If you have plans to buy a home or a car, getting prequalified or preapproved can provide you with the information you need to determine if your budget is realistic.
If you’re applying for other debt types, such as a credit card or a personal loan, the process can give you an idea of the loan amount you can get once approved.
- Determines Any Credit Issue You May Need to Fix
As emphasized earlier, both processes can undergo a soft credit inquiry. Thus, the lender will automatically inform you if your credit status has an issue. With this, you can get a chance to address any issue, work on your credit score, and boost your odds of getting your application approved.
To Sum It Up
It’s crucial to know that the definitions between prequalification and preapproval tend to vary by lender. So, it’s recommended to learn more about the lender’s processes. Although these processes won’t guarantee any approval, they are still beneficial since they can give you an idea of what could be if you apply for credit.