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Prequalification is a process used by financial institutions to determine a consumer’s creditworthiness based on personal finance qualifications. It is not the same as preapproval and does not guarantee credit. Consumers provide financial information to initiate the process, and the institution evaluates the information to determine initial creditworthiness. The process does not obligate the institution to lend funds, and consumers can change their mind at any time.
A prequalification is a method used by credit or financial officers to determine if a consumer is creditworthy based on certain personal finance qualification characteristics. This may include getting prequalified for loans to make small or large purchases, home improvement loans, business start-up loans, or debt consolidation loans. A prequalification process typically begins with a consumer starting a credit application and providing detailed information about tangible assets, credit, and financial history.
Prequalification should not be confused with the term preapproval, which is based on certain tangible assets, such as property ownership or cash, plus low-risk factors associated with credit and debt history. A pre-approval simply means that someone is automatically eligible for credit in some way based on their status, such as owning a home or meeting other eligible criteria. Prequalifications consist of having to meet certain criteria to be eligible, so credit is not automatically guaranteed or implied.
To be prequalified, the consumer generally begins the process by contacting a bank or financial institution to initiate the credit application. This can be done in person, over the phone, or online. The consumer provides information about their personal financial history, work history, credit history, personal assets, and intent on the loan amount. The credit manager then evaluates this information to determine if the consumer meets initial creditworthiness guidelines, based on the amount of risk associated with providing money to the consumer.
It is important to note that a pre-qualification process does not obligate or oblige the financial institution to lend funds to the consumer. Rather, it gives the consumer the opportunity to kick off the credit application further by giving the financial institution legal permission to further investigate the consumer’s employment history, income, banking records, credit score, and other financial history. Once the consumer signs the prequalification forms, the bank, lender or mortgage company has the right to do a full background search to determine the actual credit risk the consumer may impose.
At any time during the prequalification process, the consumer has the right to change their mind about accepting credit from the lender. Consumers often shop with local banks and credit card companies to find the lowest interest payment rates and the quickest route to needed funds. With this in mind, many financial institutions use the prequalification process to try to get the consumer to commit to using the services provided by processing the credit application quickly and offering the best rates. The consumer gets an estimate of how much credit can be extended, for how long, and what the average monthly payments will be during this time, which may be the deciding factor.
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