Did you get a letter saying you're pre-qualified for a loan but don't know whether that means you will get a loan or not? Is being pre-qualified the same as being pre-approved? And which is better: getting pre-qualified or pre-approved for an online loan? It's not unusual to get such questions or be confused between the terms pre-approval and pre-qualification.
Lenders could mean different things when using specific financial terminologies to describe their loan application and approval process. Likewise, some also use pre-approval and pre-qualification interchangeably, but they essentially represent two different stages of a loan process.
Here's a basic process flow to give you a fair idea of when you can apply to get pre-qualified and pre-approved for an online loan.
4 Steps to Get an Online Loan
When applying for a personal loan online, there are some essential financial terms that every borrower should understand to avoid any unpleasant surprises. So, we'll walk you through the meaning of the terms pre-approval and pre-qualification, how they differ from one another, and show you how they can make your loan experience seamless and accessible.
What Does a Pre-Qualified Loan Mean?
Pre-qualification is a preparatory stage in your loan process that gives you an estimate of the loan amount you can expect to receive. Lenders who provide an option to pre-qualify for a loan require you to fill out an application to initiate the process. Though the information needed for pre-qualification may vary from lender to lender, most lenders only ask for basic details about your financial situation without affecting your credit. Once you pre-qualify, you'll be sent a pre-qualification letter from the lender within one to three days. It's then up to you to accept or decline the pre-qualified offer.
The pre-qualification option can be helpful, especially when hunting for a loan that suits your budget and needs. You can submit your basic financial details to various lenders, get a pre-qualified amount, and make an informed decision. Remember, a pre-qualified loan amount should not be confused with the pre-approved amount or the final loan offer. A lender will require more information if you decide to get pre-approval or apply for a loan after being pre-qualified.
The purpose of getting pre-qualified by a lender is to assess the likelihood of you qualifying for a loan. This means there are also chances that you might not pre-qualify for a loan.
What If You Don't Pre-qualify For An Online Loan?
Being turned down for pre-qualification is undoubtedly not the end of the world. By using a few easy tips to improve your credit score, you might be able to increase the probability of your online loan application getting pre-qualified. pre-qualify We know this could take a while and so here are some steps that you can take as soon as you get denied for pre-qualification:
1. Reach Out To The Lender:
There are chances that a lender might not be able to determine your actual creditworthiness from the basic financial information you shared. You can talk to the lender to be sure and provide additional details or find out why your pre-qualification application was rejected to help you work on improving your chances of getting approved in the future.
2. Consider Adding A Co-Signer:
If your lender allows, you could add a co-signer with good credit to your loan application. Fortunately, a cosign loan can help you qualify for an online loan even with a low credit score. Since the co-signer has no right to the borrowed funds but is responsible for making the payments if you default, choosing a close family member, friend, spouse, or parent as a co-signer is better.
3. Review Your Credit Report
The inaccurate or incomplete information on your credit report can negatively impact your credit scores and make it difficult for you to pre-qualify for a loan. You can check your credit report for free and submit a dispute if you find any errors in your credit report. The credit reporting agency is then responsible for investigating and assisting you in rectifying the information.
If a lender doesn't pre-qualify your loan, you can always explore alternative loan options for bad credit. Not every lender prefers working only with people having fair to excellent credit. Since pre-qualification is quick, you could look for a lender willing to lend you money based on factors other than your credit score. After getting the pre-qualification letter, you may proceed to get pre-approved for the loan.
What Is A Pre-Approved Loan?
The loan pre-approval process is slightly more rigorous than the pre-qualification one. Lenders perform an extensive check on your financial background when you apply to get pre-approved for a loan. A pre-approval helps you determine whether you're eligible to get a loan or not, your possible loan amount, and the best available interest rate for you. You can get all this information only and only if you get pre-approved. Like pre-qualification, the lender offers a pre-approval letter to all the borrowers who have proved their creditworthiness and are just one step away from getting the actual loan.
It is important to note that some lenders charge an application fee for pre-approval. If you're not in urgent need of cash, you can inquire about other online lending companies rather than choosing the first lender that offers you pre-approval. You can find lenders who only run soft credit checks to pre-approve an online loan. By doing this, you can not only ensure that your credit won't be affected by submitting multiple pre-approval applications but won't have to wait long to get pre-approval letters from different lenders.
How Long Can You Be Pre-Approved For A Loan?
Your financial situation may not remain the same, and since a pre-approval offer is based directly on your current financial background, it may not last forever. Your pre-approval letter mentions the number of days in which the loan pre-approval expires. The days to expiration (DTE) are not the same across lenders, but a pre-approval letter is typically valid for anywhere between 30 to 90 days. You'll have to decide within this timeframe whether to go through the final loan process or not.
You can neither extend nor renew your pre-approved offer if it's about to expire. And once your pre-approval has expired, you'll have to run through the pre-approval and probably pre-qualification application process all over again.
What's The Difference Between Pre-qualification And Pre-Approval?
According to the Consumer Financial Protection Bureau, there's a very thin line between a pre-qualified and a pre-approved loan. Still, the two terms have often created a massive confusion in borrowers' minds. So, here's a table summarizing the key differences between pre-approval and pre-qualification:
Differentiating Factors |
Pre-Approval |
Pre-Qualification |
| The Objective | Provides a preliminary loan offer that mentions the loan amount and interest rate. | Provides an estimate of how much the lender may be willing to lend. |
| Need for Credit Check | Depending on the lender, it might require a soft or hard credit check. | It may require a soft credit inquiry or no credit check at all. |
| Processing Time | Due to extensive background checks, you may have to wait for the pre-approval response from up to a few days to two weeks. | The pre-qualification process is much faster than the pre-approval process. You might receive a response1-4 in days. |
| Lock the Interest Rate | You may be able to lock in your interest rate for up to 120 days. | You can get an interest rate estimate, but may not be able to lock in the interest rate. |
| Requirements | Require a thorough assessment of your finances by verifying all the financial documents requested by the lender. | Requires basic details about your financial situation which can be provided verbally or online. |
Why Getting Pre-Approved Or Pre-Qualified Is Important?
By now, you may have understood that both pre-approval and pre-qualification don't guarantee you a loan. However, there are some intangible benefits of getting a pre-approval or a pre-qualification letter:
- Getting a rough idea of the loan amount could help you know if your existing budget will be able to handle the monthly payments of a new loan or not.
- You may be able to find any errors or need to improve your credit when the lenders examine your finances as part of the pre-approval and pre-qualification process.
- It can make you look like a genuine and potential borrower.
Bottom Line
With an increasing number of lenders in the market, one might get confused while choosing the right online loan. Things can get even more tricky when you are unclear about specific terms of the loan process. Through this article, we have attempted to familiarize you with the terms pre-approved vs. pre-qualified, which can assist you in identifying a suitable lender and loan without affecting your credit score. However, different lenders refer to pre-approval and pre-qualification differently, so always check with them before proceeding further in their loan process.