It is common to receive offers from lenders in the mail or email with terms like “preapproved” and “prequalified,” but what exactly do these terms mean? Although they may sound similar, there are actually some crucial differences to consider that can affect your borrowing experience.
What does it mean to be “prequalified”?
Receiving a prequalified loan offer means that a lender has assessed your basic information, such as your income, employment history, and credit score, and has determined that you may be eligible for a loan.
The lender will provide an estimated amount you can potentially borrow and what interest rate you can expect. Although prequalification does not guarantee approval for a loan, it does enable you to shop around and compare offers from different lenders more easily.
Since prequalification only requires a soft credit check, it won’t show up on your credit report or impact your credit score. However, the lender will still need to verify your information and run a hard credit check before making a final decision if you decide to pursue a loan with them.
Applications for prequalified offers can vary in length, but they are generally shorter and less involved than traditional credit applications. Prequalified offers are usually approved quickly, and the lender will likely provide an approval decision within a few business days.
What does it mean to be “preapproved”?
Preapproval is the second step in the personal loan application process. If you’re preapproved for a loan, the lender has reviewed your initial application and verified your information. They’ve also run a hard credit check, which will appear on your credit report and could impact your credit score.
Unlike prequalification, preapproval is a more formal process that requires more documentation. You must provide proof of income, employment history, and other financial information. The lender will also look at your credit report and consider other factors, such as your debt-to-income ratio.
Getting preapproved gives you a more accurate idea of how much you can borrow and what your interest rate will be. Additionally, preapproval increases your chances of getting approved for a loan since the lender has already reviewed your application and ran a hard credit check.
It’s also important to remember that prequalification and preapproval differ from being actually approved for a loan. Even if you’re preapproved, the lender may still deny your application if they find something in your credit report or financial history that raises red flags.
What’s the difference between a soft and hard credit check?
When you apply for a loan or credit, the lender may check your credit report to determine your creditworthiness. There are two types of credit inquiries that lenders can make: a soft credit check and a hard credit check.
A soft credit check, also known as a soft inquiry, is a type of credit check that does not affect your credit score. Soft credit checks are typically used for prequalification purposes, like when you receive a prequalified credit card offer in the mail. Soft inquiries may also be made by lenders to check your credit report during promotional offers or to provide you with credit monitoring services.
On the other hand, a hard credit check, also known as a hard inquiry, is a type of credit check that can affect your credit score. Hard inquiries occur when you apply for credit, such as a loan or credit card. They are also common when you apply for rental housing or a job. Each hard inquiry can lower your credit score by a few points, although the impact is usually small and temporary.
It’s important to note that too many hard inquiries in a short period can signal to lenders that you’re taking on too much credit and can negatively impact your credit score. Therefore, it’s essential to be mindful of how often you apply for credit and to only apply when you really need it.
Applying for a loan can be a daunting task, but a better understanding of the application process and understanding the difference between prequalification and preapproval can set you up for success. In summary:
- Prequalification allows you to explore various offers from different lenders faster and without risking any damage to your credit score.
- Preapproval, on the other hand, is an excellent way to increase your chances of being approved for a loan and to get a better understanding of the interest rate you can expect.
- When determining how to proceed with a lender, consider your financial situation and your loan objectives before applying.
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