What Is A Pre-Approved Loan & How It Works? – A Quick Guide

• 17 May 2020 | 1404 Views | By Mint2Save

A pre-approved loan is another example of the qualitative use of customer data. In a bid to maximize customer base and increase market presence, several banks and finance companies have adapted this loan process.
Initially limited to personal loans, pre-approved loans are now covering credit cards, home loans, business loans, and mortgage loans. One can now be sure that the lending industry has not been the same and is developing a lot. These days you can find many of the reputable companies directly offering you to give loans. You may have received messages something like: “An offer for a pre-approved personal loan for an x amount is ready for you. Contact your branch to avail”.

Learn about: 6 Facts that Define Modern Banking

Have you ever wondered what they are talking about? With all its details and several concepts, the pre-approved loan itself and its application process can be confusing to a lot of people. Here in this article, we delve into it step by step to understand it better. Starting with an overview of pre-approved loans, we will go through its features and advantages. Next we will see how your eligibility for it will be determined, credit scores, and the process of getting the pre-approved loan. We will also see some of the tips so that you can increase the chances of getting the best loan for you.

What does it mean to be Pre-Approved for a Loan?

A pre-approval loan is a loan offered to you from a lender with classified terms and conditions stating the amount of money to be borrowed, rate of interest. In the pre-approval process, the lender will check your eligibility for the personal loan through various processes and set the conditions according to them thus making it not a binding offer.

You generally will need to give your income, employment and credit score information for the pre-approval process. It is based on this information that lenders will determine the eligibility for the loan. The greatest features with pre-approved loans are that they require very less documentation and are almost instantly done. We will discuss more on this in later sections.

The loan selection makes it manageable to rate the aggregate cost of the loan and develop a budget before taking any lead. Getting a preapproved loan will not let you confide on dealer financing. Resulting you to gain enormous mediating strength at the dealership, which can make your plan less annoying.

Features and advantages of Pre-approved Loans:

As offers for pre-approved loans are generally made by lenders who already have a good understanding of you, you require fewer documents. If you are already a customer of the bank, then you most probably do not require documents at all! 

But, This slightly can also be a disadvantage as less documentation means you will give less overall information about yourself. There could be situations where you have passed the pre-approval process for the loan but are not able to verify your income. In that case, even though you are eligible and passed the pre-approval process, your loan could be rejected.

Another feature and advantage of pre-approved personal loans are that they are processed very fast, providing you a loan within a convenient time. This is also an effect of the bank studying you for eligibility as it had done all the groundwork for considerations of approval. Also, if your credit score and other things are really well, you can get a considerably lower interest rate for your pre-approved personal loan! If it is a personal loan, you have the flexibility of usage of funds for different purposes!

How your Eligibility Gets Determined?

Not all people receive calls for getting pre-approved loans. There are many things the banks will see for determining if you are eligible for this loan or not. Lenders consult for information such as your self-identity, earnings, career information, credit record, debt expenditures while examining your application for the preapproval process.

That is, if you have a good income and manageable expenses with a good credit score and history of making payments for a credit card or loan dues, you will most likely be considered eligible for the pre-approved loan. Also, if you have been saving a lot of savings in your bank account, this would add a point for considering you eligible.

A little bit about Credit Score and Inquiries:

In the previous section, we mentioned something about credit score and history. You might wonder what a credit score is. In simple terms, a credit score is like a marks card that measures your financial health and performance. It is given on the basis of different information about you including how loyally you are paying loans, asking for different credits etc.

Do you know these 9 Advantages of Good Credit Score ?

Banks or financial institutions can ask about your credit scores through something called inquiries. When hard inquiries are made on yourself, they decrease your credit score. Hard credit inspection from numerous lenders from over 15 days up to 45 days will be charged as just an inquiry, hinging for the credit scoring. In order to underrate the influence of your credit record as you purchase for costs, You can get pre-approval within a 15 – to 45-day window.

But fortunately, most of the lenders in the pre-approval process conduct only “soft inquiries” which is sort of an unofficial credit check. That is, they check your credit score and report without an official inquiry which helps you by not decreasing your credit score.

But, not all of the lenders do this. Some still make hard inquiries on your credit score. There should generally be an indication on the pre-approval page of your lender that says whether their inquiries are hard or soft.

Process of getting for Pre-approved loan:

Pre-approved loans are offered to you by banks mostly on their initiative, and data algorithms. One has very few things to do other than contacting the bank representative and completing the formalities of the bank. Upon approval, there is lesser time consumed in money being transferred to your account. One important thing to understand is that pre-approved loans might only last for a limited duration of time as they are more of the sort “Invitation for application” than a concrete offer. So, if you need it, you need to apply as soon as you can.

But before you can go for applying, it is important for you to see if the credit inquiry that is done by the bank is hard or soft. As said before, hard inquiries hurt your credit score well. So, if you are applying for a pre-approved loan for more number of banks, then make sure that there are fewer banks that do hard inquiries on you.

How long does Pre-Approval take?

A pre-approval can take from 15 days to a month. Instead of contacting the branch of the bank, you can also apply online through your net banking accounts and choose pre-approved loans and fill in the required details. As we had discussed earlier, a pre-approved personal loan will require very less amount of documents. But, it is advisable to keep the following documents just in case: Salary slips of at least three months, Bank statements, ID proof like Social Security number, Driver’s license, and Residence proof.

As your application is detailed, you will thereby provide a decision. This may result in trials as the lender may call you for more data before making the decision. Also, keep in mind that lenders will have every right to reject your application even if you are eligible if your credit score and history is bad. If you are trying to take a pre-approved home loan, then you have to see if the property is authorized by the lender as well.

Fetch considerable offers

Approving the favorable price the dealership offers you will not be instructed, and not a reality to take the first loan. Loan underlines the impact on how the amount you will pay over the calculated tenure of the loan like interest rates and loan terms and conditions fluctuate, so receive pre-approval loans from few lenders.

What’s next after pre-approval?

You also need to check, analyze as well as correlate issued offers by banks, credit unions and online lenders have to offer and compare each offer carefully. If you skip this part of the process, you will not acknowledge that you have achieved the best offer, and also you may come out paying additional than you require to. By getting considerable offers from several lenders, you can correlate to guarantee that you are earning a rate matching your allotment.

Does pre-approval mean you are approved?

Pre-approved loans are something banks will offer you based on many indicators of your financial health and status including the credit score, income, expenditure, etc. Sometimes, you may receive messages from the lender themselves for taking the loan or you need to apply yourself.

The main advantages of pre-approved loans are that they are fastly processed and require a little amount of documentation. One can get a fair amount of interest and high flexibility of using funds if it is a personal loan.

Can you be denied a Loan after Pre-Approval?

You can get the pre-approved loan either by contacting the branch of the bank or through online net banking portals through a simple application process. You have a high chance of facing rejections despite your income being good if your credit score is low. Paying the credit/loan dues on time, not making too many credit requests on present cards, and also not asking for new cards frequently are some of the tips that can help you to increase the credit score.

How long does pre-approval last?

In case you got the message for the pre-approved loan, you got to apply it as soon as you can as they expire after a certain amount of time. The pre-approved loans usually sync with the updation of credit reports. Since credit reports are mostly updated once in -3- months, so usual time for a period for a pre-approved loan also lasts for the same amount of time.

However, various banks can have different algorithms to decide upon how long a pre-approved loan can last.