The difference between preapproval and prequalification depends on the lender and the type of loan or credit. Prequalification is a basic review of your creditworthiness to check if you are likely to qualify for a credit or loan. Preapproval is a more rigorous process and can be a better sign that you are likely to get approved for the loan. However, while you are shopping for easy loans to get online, some lenders may use both terms, prequalification & preapproval, interchangeably. In both cases, the lender has done a check to determine if you have any chance to get approved for a loan or credit line.
Once you have been pre-approved for a loan, the lender will then offer you potential interest rates, terms, and conditions. The pre-qualification process is less strict as compared to the preapproval process.
Prequalification means the lender has done a basic assessment of your creditworthiness to check whether you are likely to qualify for a credit or loan. Borrowers can initiate this process by submitting a prequalification application for a credit or loan.
The requirements for prequalification may vary depending on the lender and your financial situation. It usually involves sharing basic information about your finances such as your monthly income, existing debts, and savings. Some lenders will also check your credit score through a soft inquiry, which won’t affect your credit score.
Once you have been prequalified, you can go ahead and apply for the loan and undergo a complete assessment. The assessment may require you to submit your official documents as proof and also agree to a hard inquiry which will affect your credit score.
However, be aware that prequalification doesn’t guarantee approval. But if you can apply for prequalification with a soft inquiry, it’s a good idea to do it. If you get rejected at this stage, you can move on to other options with your credit score intact and avoid the hard inquiry.
Getting pre-approved is a better sign that you may get approved for the loan or credit but it again depends on the lender and their process. To elaborate, if you got preapproved for an online credit card, the card issuer may use the term preapproval and prequalification interchangeably and may mean the same thing.
Similarly, if you have received any preapproval offers in the mail, through texts, or by phone calls, it means you appeared in some credit reporting agency’s list of consumers that meet the lender’s criteria and as a result, have been sent concrete offers of credit or loan. If you accept any such offer, the lender must give you the pre-screened terms & rates they sent you over the phone. But to avoid loss, lenders may send you a range rather than solid numbers while making the offers. So you likely won’t know the exact terms and conditions until you accept the offer. But the pre-screened range will give you an idea of what you can expect.
In some rare cases, lenders may reject your loan request despite the preapproval offer upon a closer inspection of your credit score and financial situation. Hence, preapproval doesn’t mean you are definitely getting accepted for the loan, it’s just an indication that you are likely to get accepted.
How do prequalification & preapproval affect the credit score?
In the case of credit cards, preapproval and prequalification won’t affect your credit score as the credit card issuer does a soft inquiry. With Mortgage Closing and auto loans, the lenders will do a hard inquiry which will affect your credit score. But this will last for a few months, so your credit score will get better eventually. However, the inquiry itself will be on your credit history for two years.
Both prequalification and preapproval are good ways to get personalized loan information without affecting your credit score. They can also give you a hint as to whether your loan application will be accepted or not. If you want to increase your chances of getting prequalified or preapproved, there are a few things that you can do. Pay all your bills on time, if you have any credit cards then make sure you repay the full amount each month, and if possible, get an additional income stream. We hope this helps you understand what’s the difference between prequalification and preapproval for a loan.