What's the difference between pre-qualified and pre-approved?
As you’re looking at home or car loans, you’re going to see advertisements urging you to get “pre-approved” or to “pre-qualify” for a loan which can leave you scratching your head. Some use these two terms interchangeably, but there are key differences between pre-approved and pre-qualified.
In this article, we walk you through what it means to be pre-qualified and pre-approved for a loan. Each one has its purpose. Figuring out which one is right for you depends on what you need and where you are on your home or car-buying journey.
What is “pre-qualified” for a loan?
When you pre-qualify for a loan, you’ll get an estimate of how much you can borrow. You can contact a lender (call, email, or online application) and get pre-qualified right away. This is a relatively quick and easy process without the rigamarole of a mortgage or car loan application.
To get pre-qualified for a loan, you’ll have to present your credit score, income and assets, and debt. The lender or lending specialist won’t ask you to go into great detail when talking about your financial situation. All lenders need is a general idea of your finances so they can gauge your borrowing capacity.
What can you do with a pre-qualification?
If you’re pre-qualified, it doesn’t necessarily mean you’ll be approved for a loan. It doesn’t guaranteed that you’ll get the loan estimate provided, as well. A pre-qualification is useful for:
- Identifying how much borrowing capacity you have
- Researching the type of home or car you can afford
- Those who aren’t ready to buy yet but want to be more familiar with the market
- Checking if you can get your ideal loan amount with your current financial situation
Pre-qualification is a great first step for those who aren’t sure about their loan options. As a buyer, you can see what’s out there first before you go further.
What is “pre-approved” for a loan?
A car or mortgage pre-approval gives you a clear picture of the amount you can borrow. It also shows you how much the loan may cost. It includes the loan amount and the interest rate. With a pre-approved loan, you'll be able to calculate your potential monthly repayments.
Applying for a pre-approved loan is also more work compared to a pre-qualification. To get a pre-approved loan, you’ll have to complete a mortgage or car loan application with documentation of income, assets, and liabilities. Lenders will look into your credit and financial background too. This will require a soft inquiry on your credit which will show up on your credit report. It may temporarily lower your credit score by a few points.
Because you’re going through the whole loan application process, receiving the final pre-approval can take anywhere from a day to a week (sometimes even longer depending on the lender).
What can you do if you’re pre-approved?
A pre-approved loan may not guarantee that your loan will be approved, but it’s a good indicator of your current standing. If you get pre-approved for a loan, you’ll be able to:
- Know what you can afford and stay within your means
- Expedite your house or car search with a realistic budget
- Have more negotiating power with sellers
- Create a better home-buying or car-buying strategy
If you’re ready to buy your dream home or car, getting pre-approved for a loan is a good idea. Plus, it helps you when shopping around for a loan because you’ll have something to compare to.
Difference between pre-approved and pre-qualified
The main difference between pre-approved and pre-qualified is their accuracy and gravity. A pre-qualification only requires a quick cursory glance at your finances. Usually, the lender won’t ask you to submit proof of your finances. The loan amount a pre-qualification provides isn’t as accurate as a pre-approval.
Meanwhile, a pre-approval is a deep dive into your financial situation. It provides a more definitive amount of how much you can borrow. However, you must go through the whole loan application process and submit official documents to verify everything. A pre-approval could indicate the likelihood of a home or car loan approval.
| Pre-Qualified | Pre-Approved |
|---|---|
| You’ll have an estimate of how much you can borrow from a lender. | You have a clear idea of how much you can borrow from a lender complete with interest rate. |
| You’re only required to provide basic financial information. | You will have to submit formal documentation like proof of income, savings, debt, and the like. |
| Applying for pre-qualification doesn’t show up on your credit report and generally doesn’t require a credit check. | Applying for loan pre-approval appears on your credit report as a soft inquiry. |
| You can get pre-qualified for a loan almost immediately. | It may take a few days or a month before you get pre-approved for a loan. |
| Sellers usually won’t use pre-qualification consideration when you’re buying a home or a car. | A pre-approved loan shows sellers that you’re serious about the home or car purchase which puts you at an advantage. |
Should you get pre-qualified or pre-approved for a loan?
Now that we’ve established the difference between pre-approved and pre-qualified, you might be wondering which is better. Ultimately, it depends on where you are on your home or car-buying journey.
If you’re at the very beginning and not quite sure where to start, getting pre-qualified for a loan can give you that much-needed guidance. Pre-qualifying for a home loan or car loan is a quick and easy way to dip your toes into the process without commitments.
A pre-approved loan, on the other hand, is great for those who are well on their way to buying a house or a car, or are actively looking to refinance an existing loan. The process requires more time and effort but provides you with valuable information about your potential loan. With a pre-approved loan, you’ll be one step closer to buying your new home or car.
What should you do now?
If you’re still not sure about whether a pre-qualification or pre-approval is right for you, get in touch with us! At loans.com.au, we can help you through your home or car buying journey.
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
