You’ve probably heard about pre-approved loans. You imagine getting pre-approved feels like finding a crisp £20 note in the dark depths of an old jacket pocket. It’s like money you didn’t even know you had! But what are pre-approved loans? Why are you being offered one? Can you apply for a pre-approved loan yourself? And do you even need one?
But wait, don’t run out and spend your new-found cash just yet. Read this article to learn all about pre-approved loans, the benefits and the pitfalls.
1. What are pre-approved loans?
So what is a pre-approved loan? In short, pre-approval is an evaluation of a borrower’s eligibility for a loan before they apply for one. Lenders offer these loans as a way of enticing borrowers to borrow money without having to worry about approval checks.
There are two types of pre-approved loan. The first type is when a lender, usually one you already have a banking relationship with, offers you a pre-approved loan. The second type is where you, the customer, submit a preliminary application to a lender to see whether the lender would approve you for a loan.
Why might a lender offer you a pre-approved loan? Through their banking relationship with you, your bank may acquire enough information about you and your finances to feel secure in offering you a loan. This saves you having to request one, should the need arise.
On the other hand, you may find a better deal from another lender. In that case, the new lender will want to assess you to ensure you are creditworthy first. If you meet their criteria, then they can pre-approve you before you make a formal application.
Why might you apply for a pre-approved loan? Lenders often advertise loans at attractive rates. Unfortunately, there’s a chance you might not qualify for those rates. Pre-approval allows you to see what a lender can actually offer you. You also have time to look over rates and terms and conditions.
2. How does the pre-approval process work?
A bank or lender carries out the pre-approval process before they offer you, the customer, a pre-approved loan. The process involves a series of checks into your credibility and financial standing.
Lenders are likely to check your credit history and behaviour. As an example, how regularly you have kept up with previous loan or credit card repayments can be taken into account. Lenders may also check your income and any bad credit weighing your creditworthiness down. All of the criteria or Lender Factors add up to create a picture of the likelihood that you’ll repay the loan in full.
If you’ve applied for a pre-approval, the lender will then provide you with a quote for a loan.
3. Does pre-approval guarantee a loan?
The short answer is no. While a bank or lender may have offered you a pre-approved loan they have the right to rescind that offer at any time.
You don’t have to take out a pre-approved loan. Just because a lender has offered or quoted you for a loan doesn’t mean you have to take a lender up on their offer!
If you do decide to take up the offer of a pre-approved loan, you will still need to submit a relevant application along with the necessary documents. This may take considerably less time than a standard loan application as the lender has already identified you as eligible for a loan during the pre-approval process.
However, lenders are obliged to carry out a number of further checks for identity and fraud purposes, and there is a small chance you might fail these subsequent checks if the lender has reasonable concerns.
4. What are the pitfalls of pre-approval?
Lenders may offer pre-approved loans for a limited time only. If you are set on a pre-approved loan, you will have to act fast to secure the loan before the offer expires.
However, before you take up the offer of a loan, ask yourself, ‘Do I really need a loan?’ Spending money unnecessarily by taking out a loan you don’t need is something to be avoided at all costs.
Remember to check the terms and conditions of the loan, as well as what would happen if you are unable to repay. A pre-approved loan may have higher interest rates compared to other loans on the market so ‘shop around’ and look at comparable offers from other lenders, including their terms and conditions.
But when comparing deals be sure to check whether your searches will show up on your credit report. Some lenders carry out a full credit check before they offer you a quote. These checks can show up on your credit report and, if you’ve enquired about a number of loans in a short period, could harm your creditworthiness. One way to avoid this is to ask lenders whether they offer a ‘quotation search’ which doesn’t show up on your credit report.
5. Where is the best place to get a pre-approved loan?
At Credibble, we have an in-depth understanding of the criteria lenders are looking for during the pre-approval process. Credibble breaks down your credit report, explain exactly how lenders view you through our Lender Report, and offer you tailored insights into the best financial products for your specific situation making us the best place to get pre-approved.
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Last updated by Robert Edwards, April 2022