This resource is part of the Innovative Funding Services (IFS) auto finance Library.
What is the difference between car loan prequalification and preapproval?
Prequalification is not the same as preapproval. Both refer to an evaluation that can come before a loan application; however, they differ in their purposes and intended meanings for applicants.
Lenders and financial institutions offer prequalification as a way to indicate to a potential borrower that he/she appears to be a good loan candidate.
If a lender prequalifies you for a loan, it is telling that you appear to be a good candidate for a loan based on limited information it has on you or that you supply it. This information can include details about your debts, assets, income, credit score, and more. However, lenders require less information to prequalify a person than to approve him/her for a loan. If you are in the market for a loan, you need to understand that prequalification is no guarantee of approval.
Preapproval is more concrete than prequalification, yet it is still not the same as a loan application approval.
When a lender considers you for a preapproval, it looks at much of the same financial information that it would when considering a loan application, such as your credit history and capacity to pay a loan. What is usually missing from a preapproval application is the actual asset (usually a car or a home) that the potential borrower wishes to purchase.
People usually seek preapproval while they are still shopping for their new cars or homes because a person can take a preapproval to a seller as proof that he/she can secure financing to purchase the asset, which can bolster a buyer’s bargaining power. Moreover, preapproval affirms a borrower’s belief that he/she can afford the car or home he/she wishes to buy, because a financial institution has poured over his/her financial background to determine his/her credit worthiness.
However, if you are preapproved for a loan, you are still not guaranteed a loan. You still have to put in a formal application to buy your new car or home before you can get your loan. Like with prequalification, preapproval does not guarantee that your actual loan will match the loan terms quoted to you or that your lender will even approve your application.
Prequalification and preapproval are meant to be useful sources of information for potential borrowers. Both give a person some sense of the type of loan that a lender might give them. But no lending institution will extend a loan based on prequalification or preapproval alone. To offer a loan, a lender needs a loan application complete with extensive information on the borrower and the asset he/she wishes to purchase.
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This resource is for educational purposes only. Its content is designed to explain concepts, not to present exact definitions or to reflect how all financial institutions or auto companies conduct business.