When you apply for a loan, there are two terms you frequently hear: prequalified and preapproved. For the most part, the difference between these terms is technical -- different lenders use these terms in different ways.
The difference between prequalification and preapproval
When you apply to a lender for a car loanLinks to an external site., for example, and get back information you are prequalified or preapproved, it means there is a possibility your loan will be authorized. To obtain such a letter, you will need to apply with information on your assets, income, and personal credit report. Based on this information, the lender should be able to take a preliminary call on how much they are willing to lend you.
When you apply to one major bank, they will usually answer with the word prequalified in their reply. After a credit check and other kinds of scrutiny, they may decide to lend to you.
Both the words prequalified and preapproved appear in communications from another major bank. They have specific ways of using these terms, however. When you apply to be preapproved for a loan from this bank, it means the process needs a credit check. When you apply to be prequalified, on the other hand, it means there is no credit check required.
Why are these terms important?
Whether you're prequalified or preapproved, it doesn't mean you are guaranteed a loan. It only means you are past the first step on the way to getting a loan. There are benefits to working with these terms, however. When you apply to get past one of these borrowing stages, you tell the lenders you are serious about borrowing. Being a serious potential borrower puts you at an advantage in a competitive market. Lenders may compete with one another to get your business.
There are other benefits, too. When you need to buy a car, you approach a lender for a car loan. There, they look at your credit, and decide how much your budget should be. It's not very different for home loans. When you apply to get prequalified or preapproved, the lender looks at your personal credit and decides how much you may be able to repay. Knowing this information can help you plan for the future.
Applying for preapproval or prequalification also gives you a chance to set your credit rating straight. Since lenders will look at your personal credit rating, you may use the opportunity to look over your credit reports and find out if there are any items that need to be disputed. You may push up your credit rating when you successfully dispute such items.
Finally, if you are preapproved or prequalified for a smaller amount than you hoped for, or if you are rejected outright, you can use the opportunity to ask the lender what you can do to improve the outcome of your application the next time you apply.
