Credit 101: Prequalified vs. preapproved

Loans. We’ve all heard of them. Student loans, car loans, mortgages. At some point in your adult life, you might consider one — and perhaps even apply for one. So, when the time comes, it’s best to be prepared. Whether you want to take out a loan, secure a mortgage, or open a credit card, you’ll need to go through an application process. This involves providing your information, agreeing to a credit check, and more.

There are several terms involved in the credit application process that are helpful to understand. Take prequalified vs. preapproved, for instance. They sound similar, but are different terms. We’ll tackle what prequalification and preapproval mean, the key differences between them, and how you can use this new knowledge to feel confident about the loan process.

How does applying for a loan or credit card work?

Personal loans, mortgages, credit cards, student loans, and car financing all share a common theme: They are all forms of credit.

Put simply, credit is the ability to borrow money now and pay it back later (with interest). Understanding how credit works is an important part of personal finance and financial literacy.

In order for a bank to loan you money, you’ll need to apply and be approved. In general, the application process includes submitting information like:

• Your name, address, date of birth, and Social Security number

• Your annual income or a paystub

• Brief information about your monthly housing costs, like whether you rent or own and how much you pay

• Other information that the bank requests (like tax returns, bank statements, or other proof of financial details)

With a normal application, you submit all this information, and then the bank runs a credit check. This means they review your credit report. Looking at your credit history allows the bank or lender to see how you’ve used credit in the past, enabling them to make an informed decision on whether or not they wish to approve your application. 

The lender will then use your “creditworthiness” (based on your credit report and score), combined with your annual income and financial information to gauge your eligibility for the product you’re applying for.

Generally speaking, it’s easier to get approved for loans and credit cards if you have good credit and good income. Of course, there’s a lot that goes into credit applications, and each lender has their own criteria. 

The loan approval process varies a bit depending on the financial product. Let’s take a look at two popular loans:

The mortgage application process

Mortgage lenders will have a much more involved mortgage application process compared to something like a credit card application. It’s important for homebuyers to get preapproved for mortgages so that they can show sellers that they are qualified buyers. 

To get preapproved, applicants will have to fill out a detailed application, which includes financial and credit information. The lender will also likely ask for supporting documents to prove certain aspects — like tax returns or pay stubs to prove your income. 

Many homebuyers will aim to get preapproved with multiple lenders so that they can compare mortgage rates. Each lender will consider the applicant’s details, and then calculate the maximum amount that they are willing to lend out — and at what interest rate. 

Once a homebuyer is preapproved for a mortgage, they can start shopping for houses and putting in offers. Once an offer is accepted, the buyer will work with their bank to begin the closing process, which involves additional steps. 

The credit card application process

The credit card application process is generally much simpler. You fill out a one-page form online (or by mail) that asks for your personal information, Social Security number, income, and a few other financial details like how much you pay for housing. 

Once you fill out the application, the lender will access your credit report and either approve or deny you. This often happens instantly, but in some cases there may be a delay of up to a few days.  

Credit card issuers don’t typically verify your income or ask for any supporting documents. 

That’s the normal loan application process. But you may have received a preapproved offer or a prequalification letter in the mail. What does this all mean?

What does prequalified mean?

Being prequalified for a credit product means that the lender has reviewed some of your financial information and determined that you meet at least some of their approval criteria.

For instance, maybe the lender has done a soft credit check and determined that your credit score is adequate for a certain credit card. However, the lender doesn’t necessarily have all the information they need — like your income info — to actually approve you.

Prequalification does not mean that you will be approved if you do apply. It’s essentially the lender saying that you could be approved, but they will need more information to decide for sure.

Depending on the lender and the financial product, the prequalification process might involve steps like submitting some personal information. If you’re already a member of a certain financial institution, they may even prequalify you for other financial products without any prompts from you. The specifics vary from lender to lender.  

What does preapproved mean?

Similar to prequalification, preapproval means that a lender has reviewed some of your financial and credit information and has determined that you meet at least some of their approval criteria. Usually, preapproval requires the applicant to agree to a credit check — and perhaps even verify other information, like provide proof of income. 

Again, preapproval is not a guarantee of approval. You still need to fully apply and be approved (or denied) by the lender.

Preapproval generally involves more steps. It’s often the first step toward securing a mortgage or a loan. 

For instance, a first-time homebuyer entering into the home-buying process might seek preapproval from several different banks to compare APRs and other details. This would allow them to compare rates without providing in-depth financial documents and other details (which would be required later if the homebuyer decided to move forward with an application).

Each lender has their own preapproval process, but generally speaking, you’ll need to submit detailed information and agree to a credit check. 

Prequalified vs. preapproved

What is the difference between preapproved and prequalified? Preapproval is usually a more thorough process, which involves the lender verifying more of your information and accessing your credit history. Prequalification is usually less involved, and may just mean that the lender has done a “soft” credit pull and is hoping that you’ll apply for their credit card or loan.

For instance, a prequalified notice for a credit card might be mailed to you out of the blue, with no effort required on your end. But receiving a preapproved offer for a mortgage loan, for instance, would require a thorough preapproval process.

Both “preapproved” and “prequalified” mean that the lender has accessed some of your information and considers you a likely candidate for their credit product. Some lenders (and particularly credit card issuers) even use the two terms interchangeably, but they’re actually different terms in most situations.

Preapproval is also likely a more accurate indication of your approval odds for a loan (simply because the lender has already verified more of your information). Prequalification may be a less accurate signal of your approval odds, as the lender doesn’t have as much of your information on file. 

Prequalification vs. preapproval: Effects on credit score

Does getting prequalified or preapproved for something affect your credit? Well, that all depends on the type of credit inquiry.

A soft inquiry won’t have any affect on your credit. Soft inquiries allow lenders to essentially get a preview of your credit information, without accessing your full report. Soft inquiries are often used for prequalification for credit cards and some loan types.

A hard inquiry will have a small effect on your credit, but it’s usually minor. You can expect your score to temporarily drop by around 5 points. Hard inquiries are used for the preapproval process of larger loans, like mortgages.

Keep in mind that in either case, to actually get approved for a loan or credit card, you’ll have to proceed with a full application. In almost all cases, this will result in a hard credit pull, which will affect your credit. Taking out a loan or opening a new credit card will also affect your score, but this could have a positive or a negative impact depending on your financial situation.

What comes next after preapproval or prequalification?

If you receive notice that you’ve been preapproved or prequalified for a financial product, the next steps depend on the type of credit.

Credit cards are relatively straightforward. You simply submit an application, either online or via the mail, and the card issuer will make their decision on whether or not to approve you. You may be asked to enter a unique code that was included on your preapproval letter, but this isn’t always necessary.

For mortgage prequalification or mortgage preapproval, more steps are required. Getting preapproved for a home loan tells sellers that you’re a serious buyer and also gives you a chance to compare estimated interest rates between lenders. But before getting fully approved for a mortgage and closing on a new home, you’ll need to complete more steps.

Generally, this looks like submitting supporting documents that prove the information you provided. For instance, the bank will likely ask for tax returns and/or pay stubs to prove your income. They will then also do a hard credit inquiry (if they haven’t already) and submit your application to a process known as underwriting. This process can take several days or weeks before receiving preapproval.

Ultimately, each lender and financial product has a different process. If you have any questions, it’s best to contact the lender directly.

Prequalified or preapproved: Understand the difference

It's important to note that prequalification and preapproval are not guarantees that you will be approved for a loan or credit card. While preapproval is a more involved process, often used for mortgages and other large loans, prequalification is a less involved process, and often used for credit cards and small loans. 

With both, lenders will still need to review your full application and credit history before making a final decision. However, getting prequalified or preapproved can give you a better idea of what you can afford and help you make more informed decisions about your finances. 

For more tips on managing your credit and improving your financial health, visit the Greenlight blog — and discover personal finance content for kids, teens, and parents.