If you’re looking at applying for a home or car loan, it’s more than likely that you’ll stumble upon these two terms.
While we can’t necessarily argue that one term is better than the other in the loan application process, pre-approval does have the upper hand on pre-qualified.
Think of it like this. Pre-qualified is like window shopping for a new couch with an approximate budget in mind. You aren’t too sure of your exact budget and don’t really know what couch you want to buy. Whereas pre-approval is when you know exactly how much you can spend and you have a great idea in mind of what you’re after.
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Which is better: pre-qualified or pre-approved?
Pre-qualified and pre-approved both have their own important part to play in the home/car buying process.
However, it can be said that pre-approval has more weight than pre-qualified as pre-approval means a borrower is one step closer to receiving a loan from a lender (but this is not an indication the loan will be successful).
What does pre-qualified mean?
Pre-qualification is a quick and easy step in a loan application that provides you with an estimate of your borrowing capacity. In other words, pre-qualification is only a general indication of how much you can borrow, that is usually obtained via a phone call or online application.
Unlike pre-approval, pre-qualification won’t appear on your credit report.
Receiving pre-qualification is great for those who are conducting preliminary research for a home or car, but aren't willing to buy right at this moment.
What does pre-approval mean?
Pre-approval (otherwise known as conditional approval) is an initial assessment from a lender that tells you exactly how much they will let you borrow based on your current financial position and also the interest rate they will offer you.
A lender will typically require the following information when applying for pre-approval:
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Your salary and if necessary, money from investments
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Your assets
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Your credit card debts and other loans e.g. car
They may also conduct a credit check, at least with full pre-approval assessments.
It’s important to note that a pre-approval status does not guarantee you’ll be approved for the loan you ultimately apply for. It merely provides you with a realistic picture of what you can afford so you don’t go off searching for something that’s way out of budget.
What’s the key difference?
Think of pre-qualification as a surface-level look at your information while pre-approval, on the other hand, requires a deeper review into your documentation.
Additionally, pre-qualification gives you an estimate of your borrowing capacity while pre-approval provides a definitive answer.
Rather than considering one to be superior to the other, view both as tools to help you get started on your home/car loan journey.
| Pre-qualified | Pre-approval |
| Provides a general idea of how much you can borrow | Provides a definitive answer of how much a lender will loan you and an interest rate (this does not guarantee full loan approval) |
| Assesses basic financial information | Full assessment of finances through documentation e.g. income, savings, assets, daily living costs, etc. |
| Can get an answer within the same day, or even within a few minutes depending on the lender | Requires the completion of a mortgage application |
| Usually doesn’t require a credit check | Can take a few days to find out the status |
| Does not appear on your credit report |
Credit checks |
| Appears on your credit report |
What is the difference between pre-approved and pre-qualified for a mortgage?
In layman’s terms, mortgage pre-qualification from a lender offers a potential borrower an estimate of how much they can afford to spend on a home.
Rather than reviewing a pile of documentation as with a pre-approval, a lender will generally take you at your word about your financial situation with pre-qualification. They’ll collect basic financial information about you that you’ll likely know off the top of your head such as your income, any debt you may have, and details about your bank accounts.
While pre-qualification isn’t a requirement, it can be a helpful step in the home buying process as it can provide you with a somewhat realistic budget to stick to. This is the precise moment pre-approval comes in and takes the reign.
Unlike offering you a ‘somewhat realistic’ budget or borrowing ‘estimate,’ pre-approval is when a lender tells you the exact amount they will lend you to buy a home.
To gain pre-approval, a lender will undertake an in-depth review of your current finances and likely perform a credit check. If you’re pre-approved, you’ll receive a pre-approval letter which is an offer to lend you a specific amount (this is not a final commitment).
When trying to find your dream home, there are so many options on the market that it can be difficult to choose ‘the one.’ With a home loan pre-approval, you can at least narrow your search to properties that fall in your budget.
While a pre-approval is a valuable step in the home buying process, it is not a requirement. But why miss out when it can make life just that little bit easier?
What is the difference between preapproved and prequalified for a car loan?
If you’re on the hunt to buy a brand new shiny car, having pre-approval in your back pocket can be a huge advantage.
So, what does it mean to have pre-approval for a car loan? Let’s take a look.
Car loan pre-approval is when a lender reviews your financial circumstances (your credit rating, liabilities, and assets) and determines how much you can afford to borrow. They agree, in principle, to lend you a certain amount of money to buy a car.
A huge benefit to a pre-approved car loan is your negotiating power. When the time comes to talk price with the salesperson, you know exactly how much you can spend which means you can bargain with confidence. On the flip side of the coin, you also know your budget limitations, so if the salesperson won’t meet you halfway you’ll know to walk away and find something else.
Two important points to remember. Car loan pre-approval is only valid for a limited time (1 to 3 months) and again, is not a guarantee you will receive the final loan.
See Also: Compare car loans that offer pre-approval
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Savings.com.au’s two cents
Buying a car or home, while exciting, can require a bit (or a lot) of effort when it comes to organising your finances.
You don’t want to go in blind, choosing the perfect car or house to only find out that you can’t afford to borrow that much money from your lender.
The best way to be prepared (and avoid disappointment down the line) when you begin your hunt for your dream home/car is to get pre-qualified or pre-approved. Now that you know the differences between the two and what they mean for you in the loan process, you’ll be able to make an informed choice on which is best to apply for in your situation.
If you’re 100% ready to get the show on the road and get a loan, then pre-approval is the way to go.
Or, if you’re just looking at shopping around and aren’t too sure whether you want to commit to a loan now or in the near future, pre-qualification is a good way to start.
Image by William Fortunato via Pexels
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