Final answer:
Prequalification is the correct term for the early-stage process where borrowers submit details to discover potential loan rates and terms. It includes income verification and credit checks but differs from loan approval, which is more involved. Other methods to assure banks include providing a cosigner or collateral.
Step-by-step explanation:
​Prequalification is an early-stage process that allows borrowers to submit personal details, such as credit score and financial documents, to learn about available loan rates and terms. This process is vital for the financial capital market, as it provides a preliminary assessment of the borrower's creditworthiness before a bank agrees to provide a loan. It involves the prospective borrower filling out forms regarding income sources and undergoing a credit check. While prequalification gives an idea of the loan terms one might expect, it's not the same as loan approval, which is a more in-depth process culminating in a formal offer.
To further reassure a bank amid imperfect information, a borrower might also provide a cosigner, who legally pledges to repay the loan if the original borrower cannot, or offer collateral, such as property or equipment, which the bank could seize if the loan isn't repaid. Meanwhile, the underwriting process involves a more thorough vetting of the borrower's financial situation, and a closing disclosure comes later in the loan process, detailing the final terms.