Preapproved loan: What is it?

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In a Nutshell

A preapproved loan could be a preapproval you’ve applied for on a loan for a car or home, or a prescreened offer based on your credit reports.

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Not all preapproved loan offers are the same, but each type can be helpful in the right situation.

The term “preapproved loan” can be confusing, because it refers to two different types of offers. That said, both types of preapproved loans come with benefits you can take advantage of.

You can apply to get preapproved for certain types of loans, like auto loans and mortgages. Lenders may check your credit and other financial information to determine how much they’re willing to lend you before you even find or start looking for a new house or car. This preapproval generally depends on your credit and finances remaining the same once it comes time to buy. But a preapproval is only a conditional green light that you’ll qualify for a specific loan; it doesn’t guarantee final loan approval. Final loan approval is contingent on other conditions and specifics. For example, the lender will likely want to approve the specific car or home you’re purchasing before approving the funds.

The other type of preapproval is the preapproved loan offers you receive in the mail for personal loans, auto loans, lines of credit and other types of loans. These mean you have a very good chance of getting approved for those specific offers, but there’s no guarantee of being approved. That’s because they’re based on the information the lender has reviewed from your credit reports.


How does getting preapproved for a car or mortgage loan work?

A preapproved loan typically requires you to fill out a preapproval loan application with your financial information, and lenders will usually check your credit. You don’t have to know which specific car or home you’ll end up buying when you apply for a preapproval.

After analyzing your preapproval application, credit and other information, the lender will let you know if you’re preapproved for a loan. If you are, the lender will usually let you know the total amount you’re preapproved for. Of course, you don’t have to borrow the entire amount. In fact, it often makes sense to borrow less than what a lender is willing to let you borrow.

After you decide on the car or home you want to buy, you’ll talk to the lender and finish your full loan application. Even though you were preapproved, your final loan application may still be denied if something in your financial situation or credit reports changed.

Getting preapproved for a loan helps sellers feel confident that they aren’t wasting their time with an insincere buyer looking at dream cars or homes they can’t afford. Your preapproval shows sellers you have the income and credit to complete the sale.

How do preapproved loan offers you get in the mail really work?

A lender could send loan offers out via mail, or email, to as many people as possible, hoping that they’ll apply and get approved. But it’s often more productive to use detailed consumer information to target potential borrowers who’ll likely be approved for these offers, which can include personal loans, credit cards or personal lines of credit.

Companies review information in your credit reports, or from other third parties, against a set of criteria. If you meet the company’s requirements, then it may send you a preapproved loan offer inviting you to apply for a loan.

Once you receive a preapproved loan offer, you could be formally approved as long as your credit information hasn’t changed and your financial information supports the loan that the lender has preapproved you for.

Unfortunately, some people that receive a preapproved loan offer will be denied when they actually apply. For example, you may be denied if a lender sent you a preapproved offer but didn’t know you’d already exceeded the debt-to-income ratio required for its loans.

Also, changes in your credit reports that occurred after your profile was prescreened may disqualify you. Say a lender reviewed your credit profile when you weren’t carrying a balance on any of your credit cards. If you end up having a financial emergency and have to max out your credit cards to pay for it, your credit reports can substantially change — that difference in your credit reports could result in a denial.

A benefit of receiving preapproved loan offers is that you get an idea of which interest rates, loan amounts and other terms you may qualify for without affecting your credit. Normally, you figure out this information when you actually apply for a loan. But loan applications result in hard inquiries that could damage your credit scores. This is because preapproved loan offers you receive only use soft inquiries to access your credit file. And soft inquiries do not impact your credit scores. But if you decide to apply for the preapproved offer, your lender will likely pull your credit, which results in a hard inquiry. A hard inquiry can impact your credit.

Learn more about hard and soft credit inquiries

Bottom line

Both types of preapproved loan offers can be helpful, depending on your situation.

If you’re in the market for a new car or a new home, for example, consider applying for a preapproval. They can help you figure out what you can afford. They’ll also show salespeople you’re serious about moving forward with the transaction.

And the next time you’re considering taking out a personal loan, look for preapproved loan offers in the mail. These can show you what types of offers and terms you might qualify for.

Watch out though: Don’t let preapproved loan offers give you a false sense of security. Just because you’re preapproved for a particular offer doesn’t mean you’ll get approved or get the best terms available. Shop around to verify you’re getting the best loan for your particular situation.