To prequalify or to get preapproved . . .
August 9, 2024 • 11 minute read
. . . the question is: What’s the difference?
If you’ve ever considered getting a credit card or taking out a vehicle or personal loan, you may have been advised to get prequalified early in the process. Or — wait a minute — maybe the advice was to get preapproved. Which was it? Does it matter? The short answer to this last question is yes.
Estimates on loan amounts, rates and terms
The terms “prequalify” and “preapproval” might feel similar because they are. Both may be significant steps toward securing a loan, but there are important differences.
The meanings of these words depend on the type of loan that’s being discussed and the financial institution that provides the loan. Although they may be bandied about outside of financial institutions as if they mean the same thing, they don’t.
What both words have in common is the basic idea that a financial institution has looked at some of your credit and financial information and determined you’d likely be approved for a loan, line of credit or a credit card, and they can offer a reasonable estimate of the amount, rate and terms you’d be eligible for.
However, neither prequalifying nor being preapproved are guarantees of approval. They are simply loan estimates made in good faith. Yet preapprovals are generally closer to the mark — they usually require a more thorough investigation into your credit and finances than the prequalification process.
Preapprovals and why they’re smart
Preapprovals happen because one of two things occurred: either you applied for a preapproval or a financial institution offered you one.
From credit cards to auto loans
When financial institutions offer you a preapproval seemingly out of the blue, it means they have some information about you and they have a product they think you’ll like. And if they’re using the word “preapproved,” they’re feeling confident about what they’re offering.
Preapprovals initiated by financial institutions are most often for credit cards or auto loans, although you can apply for preapproval as well. Applying for preapproval makes particular sense for auto loans and may be helpful for negotiating. You can always reject the loan offer if you decide not to use it.
Preapprovals can range from very good estimates to firm offers with loan amounts, rates and term lengths, provided you meet all the eligibility criteria. In some cases you simply accept the terms of the preapproval and get your loan.
Summary
Summary
The words “prequalify” and “preapproval” can indicate different points of the loan application process and the details depend on the type of loan, the financial institution or the person doing the talking. Below are some basic guidelines for understanding these words when used by a financial institution.
| Loan type | Prequalifying | Preapproval |
|---|---|---|
|
Auto and other vehicle loans, credit cards, personal lines of credit, personal loans Auto and other vehicle loans, credit cards, |
PrequalifyingSometimes used interchangeably with "preapproval." Usually initiated by applicant. Not a firm offer. Complete application required for firm offer. Seldom requires hard credit pull. |
PreapprovalSometimes used interchangeably with "prequalifying." Initiated by financial institution or applicant. Usually considered firm offers; application with proof of income may be required. May require hard credit pull. |