What is the Difference Between a Prequalification and a Preapproval?
Understanding the Difference Between Preapproval and Prequalification in Bank Loans
When seeking a loan for your franchise, you might come across the terms "preapproval" and "prequalification." While these terms are often used interchangeably, they have distinct meanings. Understanding the difference between the two can help you understand the lending process more effectively. Let’s explore what preapproval and prequalification mean and whether either assures loan approval.
What is Prequalification?
Prequalification is an initial step in the loan application process where a lender or other funding source provides a preliminary assessment of your eligibility for a loan. This process involves providing basic financial information, such as your income, debts, and assets. Based on this information, the lender gives you an estimate of the loan amount you might qualify for.
Key Points about Prequalification:
Informal Process: Prequalification is a relatively quick and informal process, often done online or over the phone.
Soft Credit Pull Only Required: The soft pull doesn’t involve a hard credit check, so it won’t impact your credit score.
Estimates: The loan amount provided is an estimate based on your qualifications, not a guaranteed approval amount.
No Obligation: Prequalification does not obligate the lender to approve the loan or commit you to proceed with the loan application and final approval.
What is Preapproval?
Preapproval is a more involved process than prequalification. It involves a more thorough evaluation of your financial background, including a detailed review of your credit history, income, assets, and debts. When a lender preapproves you, they are essentially stating that you are likely to be approved for a loan up to a certain amount, pending final verification.
Key Points about Preapproval:
More Formal Process: Preapproval is a formal process that requires submitting detailed financial documents and undergoing a hard credit check.
Credit Check Required: It typically involves a hard credit inquiry, which may temporarily affect your credit score.
Conditional Approval: A preapproval is a conditional commitment from the lender, indicating that you are likely to be approved for a loan, subject to final checks and verification.
Does Either Assure Loan Approval?
While both prequalification and preapproval are useful steps in the loan process, neither guarantees final loan approval. Here’s why:
Prequalification: Since prequalification is based on limited financial information and doesn’t involve a detailed financial review, it provides only an estimate of your borrowing capacity. It does not include a thorough analysis of your creditworthiness, so it’s far from a guarantee of loan approval.
Preapproval: Preapproval is more thorough and gives you a stronger indication that you will be approved for a loan. However, it is still conditional, not guaranteed. Final approval depends on additional factors such as verification of all financial documents, credit worthiness, and any changes in your financial situation.
In a Nutshell
Understanding the differences between prequalification and preapproval can help you better prepare for the loan application process. Prequalification gives you an initial estimate of your borrowing capacity without affecting your credit score, while preapproval provides a more definitive indication of loan eligibility but requires a thorough financial review and may impact your credit score.
Neither prequalification nor preapproval guarantees final loan approval, as both depend on further verification and underwriting processes. However, prequalification and preapproval can help you determine the type of franchise you will be able to purchase based on an anticipated loan amount. It’s essential to work closely with your lender or funding source to help you understand the requirements and conditions associated with each step to improve your chances of securing the loan you need.
Flourish Commercial Capital can help you understand the prequalification and loan approval process. Schedule a call today to understand the amount for which you can qualify. Calendly.com/kina
