Pre-Approved Loan Offer: What Does it Mean?

If you want to take out a loan, it can be difficult to know which ones you are eligible for and how much you can borrow.

Applying for a loan could affect your credit score, so you only want to apply if you are confident you’ll be approved. But how do you know if you’ll be accepted unless you apply?

This is where seeking pre-approval for your loan can help. If a lender pre-approves a loan, it means that, pending final checks, it will lend you the money over the agreed term at the agreed interest rate.

Read on to find out more about pre-approved loans, what information you need to give, and why they can be useful.

What is a pre-approved loan offer?

When you’re pre-approved for a loan, it means the lender provisionally agrees to lend you the money, based on the preliminary information you give them.

It doesn’t mean you are guaranteed to get the loan. Final approval for the loan will be subject to a hard credit check and other final checks.

Similarly, if you’re looking to buy a house, you can get a mortgage agreement in principle (AIP) to give you an idea of how much you could be eligible to borrow. And, similar to a pre-approved personal loan offer, having a mortgage agreement in principle does not guarantee that you will be approved by the lender.

How can I get a pre-approved loan?

Many lenders and credit brokers will allow you to check your eligibility or give you a quote for a loan free of charge and without it affecting your credit score. From the information you give, they will then decide whether to offer you a pre-approved loan.

You will need to tell the lender how much you want to borrow and over what length of time, so make sure you have worked out your budget and how much you can afford to repay each month.

You can use NerdWallet’s loan calculator to see how much you could realistically afford to borrow.

Some lenders may also ask what you plan to use the loan for, such as to pay for a car, home improvements, or something else.

As well as information about the loan, the lender will need to know your:

• name
• address
• date of birth
• contact details, such as your email address and phone number
• employment status
• income and outgoings

Once you submit all the necessary information, lenders will then conduct a soft credit check. This allows the lender to confirm your identity and see certain details about your financial situation, without leaving a mark on your credit report.

It should only take a few minutes to get a decision back from the lender.

If the lender is happy with your application, it may offer you a pre-approved loan. This will typically say if you can borrow the amount you want, the term of the loan, and the annual percentage rate (APR) the lender would charge. The APR tells you how much the loan will cost you over one year, taking into account the interest rate and any fees.

A lot of pre-approved loans will guarantee this rate, assuming the details you provided were correct, however some lenders may change the rate offered after reviewing a full application. So as always, you should check the specific terms of the lender and pre-approval service.

You can see which loans you qualify for using NerdWallet’s loan eligibility checker.

Benefits of loan pre-approval

Getting a pre-approved loan before officially applying for a loan has a number of benefits:

• It should only take a few minutes to find out if you can get a pre-approved loan.
• You have a much clearer idea of which loans and interest rates you qualify for. This can make it easier to compare lenders and decide which loan to choose.
• You can see if you qualify for a loan before applying. This means you can apply with more confidence and reduce your chances of getting rejected and harming your credit score.
• Checking your eligibility and getting a pre-approved loan offer doesn’t affect your credit score.

What happens after I have a pre-approved loan?

Having a pre-approved loan offer isn’t a guarantee that you will get a loan, although it is likely. There is also no guarantee that you will be offered the exact same terms that the pre-approved loan indicated, as a change in circumstances could affect the interest rate, for example.

If you have a pre-approved loan offer, you have to formally apply for the loan before you’ll receive the money.

However, there is no obligation to apply for a loan that you are pre-approved for if you don’t want to.

If you do choose to formally apply for the loan, you’ll need to confirm the details you submitted before. Some lenders may also ask for certain documents to support your application, such as payslips to prove your income or employment status.

The lender will then perform a hard credit check and fraud checks before giving you their final decision.

Assuming all of the information you give the lender to check your eligibility is accurate, your loan application is likely to be approved.

However, it is possible for a lender to decline your loan application even if you were pre-approved.

This is likely to happen if the lender finds the information you gave when you applied for the pre-approved loan offer was inaccurate, or if its hard credit check raises any other concerns.

» MORE: Tips on how to successfully apply for a loan

What if I’m turned down?

If a lender decides not to pre-approve your loan application, your credit score won’t be affected so there is no real harm done.

However, before looking for other loans, you should consider why the lender declined your application so you don’t make the same mistake twice. This is the whole point of checking your eligibility for a loan, as you can see if you qualify for a loan without submitting a formal application.

There could be a number of reasons why you don’t qualify for a loan from a lender.

• You’ve made a mistake on your application. If there’s an error with the information you provide on your application, such as your name or address, this could raise a red flag to lenders.
• You didn’t apply for a loan suitable to you. Lenders set their own eligibility criteria, with some only accepting applications from individuals with good credit scores or those earning above a certain amount, for example. Check you meet all the requirements of a lender before filling in any loan application.
• You have a less-than-perfect credit score. Some lenders may not offer loans to people with poor credit histories. In this situation, you can take steps to improve your score before trying to apply for a new loan.

There are a number of ways you can improve your credit score, such as correcting any mistakes on your credit file, paying off debts, and limiting your credit applications.

Alternatively, if you don’t want to wait before taking out a loan, you could look at more specialist loans for bad credit. These will typically come with higher interest rates than if you applied for a loan with a better credit score, but they may be a suitable option if you can afford the repayments.

If your formal loan application was declined, don’t immediately apply for a new loan. Too many applications for credit will affect your credit score, so you should wait before trying to apply again.

Checking your eligibility for a loan won’t affect your credit score, so always do this before submitting a formal application.

» MORE: What to do if you can’t get a loan

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