In relation to personal loans, pre-approval is a term describing the borrower’s credit worthiness to take out a loan and how much they are able to borrow should they decide to go through with the process. Pre-approval on a loan is based on a number of measurable factors, including:
- Credit score
- Debt-to-income ratio
- Stability in the area
- Ability to pay
- Willingness to pay
It is also important for borrowers to keep in mind that just because they are pre-approved for a certain amount, they do not have to take the full amount of a loan they are approved for. If the individual is not vigilant and careful, it could have negative credit implications well into the future.
For instance, Tammy receives a letter from a potential lender saying she is pre-approved for a $3000 loan and takes the full amount she’s approved for. However, if she fails to meet her monthly payments on time, the addition of that loan to her credit report and the failure to meet those payments will negatively impact her credit score. This could lead to her only being qualified for loans with higher interest rates or, worse, not being approved for certain loans altogether in the future.