Prequalification vs. preapproval

You’ve decided to apply for a loan, and you’re anxious to move forward. You understand what APR means, have a good idea of what documents you need, and you’ve worked a new monthly payment into your budget. The only remaining question is whether you should ask for prequalification or preapproval.

While the two terms are similar, they often represent different parts of the loan process. By the time you’re done reading, you should understand the difference between prequalification and preapproval, and find out if either one hurts your credit score.

What does prequalification mean?

Prequalification is a less-formal assessment of your credit, based on self-reported financial information. In other words, when you prequalify for a personal loan, you don’t have to supply any documents to back up the answers you provide on a prequalification application.

Usually, you fill out a short application that gives the lender basic information, such as your name, Social Security number, contact information, income, and outstanding debts.

Based on the information you provide, the lender lets you know if it believes you’re a good candidate for a loan. If so, the lender tells you how much you could potentially borrow, what your interest rate may be, and any fees associated with the loan.

Prequalification can be a good indicator that you'll be approved if you apply, but it's not a guarantee. On the other hand, being denied prequalification for a loan is a strong indicator that you should likely consider another lender.

No impact on your credit score

In most cases, when you’re prequalifying for a personal loan, the lender conducts a soft pull or soft inquiry on your credit report. Soft inquiries aren't noted on your credit reports and won't impact your credit scores.

While a soft pull doesn’t provide the same level of detail as a hard pull, it offers the lender a sense of whether you’d be a good candidate for a loan. With a soft pull, the lender can see the following information:

• Personal details, such as your name, date of birth, and home address

• Current credit agreements (who you’re currently borrowing from)

• Recent financial history, such as missed payments or bankruptcies

Soft pulls are conducted for all types of loans, including personal loans, auto loans, and home equity lines of credit (HELOCs). Credit card companies also use them for pre-screened credit offers, and potential employers sometimes conduct soft credit pulls on job applicants—particularly if the job involves dealing with money.

It's smart to prequalify with at least a few lenders so you can compare potential rates and costs across offers. Achieve Personal Loans uses a soft-pull prequalification that could give you an estimated rate in minutes.

Achieve is not a credit repair organization and does not provide or offer services or advice to repair, modify, or improve your credit.

What prequalification tells you—and what it doesn't

Prequalification gives you an idea of what loan amount, rate, fees, and term options you may have. These are all estimates, not guarantees. The final numbers could change once the lender verifies your details in underwriting. In other words, you might be prequalified at one rate but be approved at a different rate based on your complete application.

What does preapproval mean?

Preapproval for a personal loan means you’re almost, but not quite, done with the application process. It’s a more detailed look at your finances, this time with a hard credit inquiry that will likely lower your credit score slightly.

The difference between prequalified and preapproved is that once you’re preapproved, the lender is basically saying that if everything checks out, you’re probably good to go with the loan.

Be prepared to offer the following information and application documentation:

• Photo ID, like a driver’s license or passport

• Proof of home address, such as a mortgage statement, rental agreement, or utility bill

• The name and address of your employer(s) going back two years

• Proof of income, such as recent pay stubs, W-2, or your tax return

• Your bank account number

• Your latest bank statement

Although you may not be asked for all these documents, gathering them in advance means you can provide them to the lender quickly when requested.

Impact on your credit score

After you’ve decided which lender to work with, the lender asks you to fill out a complete, in-depth loan application for preapproval. This application goes into more detail and may require documentation.

It’s during this part of the process that a lender conducts a hard pull (or hard inquiry). A hard pull could impact your credit score, although it’s typically not dramatic (a drop of 5-10 points or less is common). Fortunately, it should quickly rebound with regular on-time monthly payments.

Loan preapproval could be near-instant or take one to three business days or more—it all depends on the lender. Like prequalification, being preapproved for a loan is a good sign, but it’s not a guarantee of a loan.

Achieve is not a credit repair organization and does not provide or offer services or advice to repair, modify, or improve your credit.

What happens after preapproval?

You’re nearly there. All that’s left to do is to send your loan through underwriting. Underwriting means verifying the information you’ve provided so the lender can be sure loaning you money is a safe bet; basically, that they believe you can handle the payments.

For example, the underwriter may check whether anything has changed since you filled out the application, such as a job loss or a change in your credit profile.

Don’t worry if the lender asks you to provide additional documentation—it’s just due diligence. If you’re self-employed or paid on commission, for instance, you may be asked to provide a bit more financial information. It’s all a normal part of the process.

How long the underwriting process takes depends on the type of loan (a mortgage typically takes longer than a personal loan approval) and the kind of underwriting used (automated, manual, or a mix of both).

Once the loan application makes it through underwriting, you should receive final approval so long as nothing major has changed.

Prequalification vs preapproval: At a glance

Which one should you do first?

Here’s the sequence your loan process should generally follow:

• Shop for lenders: Achieve Personal Loans could be a good place to begin your journey. It's smart to compare at least three lenders to get the full picture.

• Prequalification: This step saves you the time and trouble of applying for the loan if the lender doesn't believe your application will make it through underwriting. And when the lender uses a soft pull, there's no impact on your credit score.

• Preapproval: Preapproval is your chance to lay it all out for the lender, showing that you can afford and handle the loan.

• Final approval: Once you receive final approval, it's time to sign your loan contract and discuss how the proceeds will be disbursed.

What happens after final approval?

Once the lender provides you with a loan contract, you should carefully read it over before signing. Depending on where your lender is located, you may pick up the check in person, have it mailed to you, or have the funds deposited directly into your bank account.

If you’re anxious for the money (and who’s not?), you can do some things that may speed the loan process along. Double-check your loan application before submitting it to ensure all information is correct, and gather any documents you’re likely to need in advance so they’re ready to go when requested.

All that’s left to do is shop for a loan that fits your goals and budget. Once you’ve found the right lender, it’s time to get started on that loan application.

Ready to get started? Check your rates with Achieve Personal Loans without hurting your credit score.