When looking or applying for a personal loan, the terms “pre-approved” and “pre-qualified” are thrown around quite often. The question is, what do these terms mean? And furthermore, how do they differ from each other?
In broad terms, pre-approval and pre-qualification are both methods lenders use to determine the likelihood an applicant will be ultimately approved for a loan, as well as the amount, rate, and other offer details. Depending on the lender, the terms can be used interchangeably, but pre-approval is typically considered to be a firmer indication that an applicant will be approved. Each method involves using an applicant’s personal financial information and credit history to help lenders judge their creditworthiness.
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What is Pre-Qualification?
Of the two methods, pre-qualification is more associated with the early stages of applying for a personal loan. When you see a pre-qualified offer, it could mean the lender has determined that you meet certain selection criteria based on your credit profile. An applicant filling out a pre-qualification form could be asked for their social security number and employment/income information, which is assessed along with their credit history to give lenders a baseline in determining creditworthiness.
What is Pre-Approval?
A pre-approved offer is extended when a lender has determined a consumer has met certain approval criteria based on their credit profile. As a result, a pre-approved applicant would have a higher chance of ultimate loan approval if they completed a formal application with the lender.
A pre-approved offer also includes a conditional commitment for an exact rate from the lender, letting a consumer know what interest rate they will receive and for what loan amount. The rates are subject to change, but are very rarely different from what a consumer will see in a pre-approved offer.
The Benefit of the Soft Credit Pull
For both pre-approval and pre-qualification, lenders are likely to perform a credit check on the applicant. The good part is, each process usually involves just a soft credit inquiry, which has zero impact on a consumer’s credit score. The expanded benefit of a soft inquiry is that if an applicant does become pre-approved or pre-qualified, they will be able to apply for a loan with greater certainty. An actual loan application involves a hard credit inquiry, but the effect is neutralized if the applicant is ultimately approved.
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The Bottom Line
Pre-approval and pre-qualification are both ways to get matched with personal loan offers that also match your creditworthiness. The benefit of each is that they likely require just a soft credit pull, with no effect to your credit score. Pre-approval and pre-qualification save time and energy for both parties, as lenders can find potential and suitable future borrowers, while consumers can get matched with loan offers with less fear of rejection.