What's the Difference Between Pre-Qualified and Pre-Approved?

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.

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.

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.

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. 

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.