What is a pre-approved loan?

You have probably encountered the term ‘pre-approved loan’ while checking your email or casually browsing bank offers online. It sounds tempting, and its face value gives the impression that a loan with your name on it is already halfway out the door. Well, this is not so far from the truth, but there is much more to it than that.

A pre-approved loan is an initial green light from the lender indicating you could borrow up to a certain amount if you chose to pursue their offer. This approval is typically based on your credit score and other financial indicators suggesting you are a good risk to lenders.

Banks or other loan providers crunch these numbers—your income, debts, and credit history—to estimate how much they can comfortably offer you. This process allows them to make an informed decision about your creditworthiness without requiring a full loan application.

Why would lenders take this proactive approach? And more importantly, why should you care about pre-approved offers as a potential borrower? Let’s unpack this idea and see what’s happening behind the scenes.

Obtaining a pre-approved loan typically begins in one of two ways: either your lender notifies you of your eligibility, or you initiate the process by applying with detailed financial information.

Before allocating funds to you, lenders seek assurances about your financial stability. They will carefully examine various aspects of your financial profile to assess your creditworthiness.

Once they have ticked all these boxes, lenders can offer conditional approval along with an offer letter detailing how much money they are willing to lend. This document is not set in stone but gives a solid foundation on which to plan your finances.

“Pre-approved” doesn’t mean what you might think. It’s not a guarantee that you’ll get the loan. It’s more like a tentative thumbs-up from the lender. It says, “We think you might be a good candidate for a loan, based on what we know about you so far.”

When you actually apply for the loan, the lender will do a more thorough check. They’ll look at your history in more detail, and based on all this information, they might even decide not to give you the loan.

But what do they know about you? And how did they get this information?

Lenders have access to a lot of data about you. They can look at :

• Your credit report: This is like your financial report card that shows your history of borrowing and repaying money in the past.
• Electoral roll status: Being registered to vote at your current address makes you look more stable
• Public records: Things like court judgments or bankruptcies.
• Your income and employment status:Steadiness in employment also plays a pivotal role; regular income assures lenders that you can meet monthly repayments over time.
• Your current debt load: Your current debts are weighed against your income (debt-to-income ratio) to ensure you are not financially overstretched.

Using this information, lenders run a “soft credit check” on you. This is different from the “hard credit check” they do when you apply for a loan.

Lenders have access to a lot of data about you. They can look at :

• Your credit report: This is like your financial report card that shows your history of borrowing and repaying money in the past.
• Electoral roll status: Being registered to vote at your current address makes you look more stable
• Public records: Things like court judgments or bankruptcies.
• Your income and employment status:Steadiness in employment also plays a pivotal role; regular income assures lenders that you can meet monthly repayments over time.
• Your current debt load: Your current debts are weighed against your income (debt-to-income ratio) to ensure you are not financially overstretched.

Using this information, lenders run a “soft credit check” on you. This is different from the “hard credit check” they do when you apply for a loan.

A soft credit check doesn’t affect your credit score, and you might not even know it’s happening. It’s a bit like someone looking at your Facebook profile without sending you a friend request.

They can see some information, but not everything, and you don’t get a notification about it. Based on this soft credit check, lenders decide whether you will likely be a good candidate for a loan. They might send you a pre-approved loan offer if they think you are.

So, what’s the point of a pre-approved loan if it’s not a guarantee?

A broker isn’t tied to any particular lender so they can offer impartial advice. Here’s what a good broker will do:

• They help you understand pre-approved offers and what they mean.
• Compare these offers with other available personal loans to find the best deal.
• Explain the pros and cons of different borrowing options.

They will guide you through the credit application process, helping you avoid all the common pitfalls.

Firstly, despite the confidence it inspires, pre-approval is not a guaranteed ticket to loan town. It is mostly an indication of potential borrowing capacity, not a promise. Many assume that once they are pre-approved, the loan deal is sealed, but this is not always the case.

Another common worry is about credit scores taking a hit from just applying for pre-approval. When lenders do their initial soft search on your credit report, it does not affect your score. However, you might see some impact if after receiving your pre-approval, you proceed with the application, which authorises a full investigation or hard pull.

Then there is the topic of fees and hidden charges; many folks reckon these are tucked away in fine print. Most reputable lenders will outline all applicable fees upfront during the application process, but it is still worth double-checking any document before signing off.

A common area that might slip through during discussions about pre-approved loans is their potential impact on your credit score. It is crucial to know that initiating a pre-approval process involves a credit check. 

Initially, lenders typically perform what is known as a ‘soft pull,’ which does not affect your score. However, once you progress beyond the initial interest phase and formalise the application for the actual personal loan, this advances to a ‘hard pull.’

A hard pull can temporarily dent your credit score. The key is not to have too many hard searches within a short period—those could add up and make more than just a dent.

Ultimately, a pre-approved loan is just one of many tools in the world of personal finance. Like any other financial product, it needs to be approached with caution and understanding. The key is to stay curious and ask questions. Why is this lender offering me this loan? What information are they using to make this offer? Is this the best deal for me?

By asking these questions, you can turn the tables on the lenders, and instead of them pre-approving you, you get to pre-approve them. You can decide which offers are worth your time and which aren’t. And that’s the real power of understanding pre-approved loans.

It’s not about getting easy money. It’s about taking control of your financial decisions. It’s about being the one who decides rather than letting lenders decide for you.