We have all seen it before in big bold letters on an envelope in your mailbox, “You’re Preapproved!” It’s usually for a credit card you didn’t ask for. But what does “preapproved” mean exactly, and did you know you can also be preapproved for car loans and mortgages too? Here we explain the basics of what it means to be preapproved for a loan and the benefits of a getting a preapproval.
What is a Loan Preapproval?
A preapproval is when a lender has reviewed your credit score and financial information before you are actually ready to take out a loan. A preapproval, whether it is for a credit card, car loan, or mortgage, explains the amount you are able to borrow and the terms, such as interest rate and length of the loan, a financial institution will give you based on your finances. It is basically an official statement from your lender to you saying “Hey, we looked at your money situation and it’s solid, here’s how much you can go shopping with, have fun!” Then, once you find your dream car or home you let your lender know and they finalize the paperwork.
Why Getting Preapproved Is Important:
There are a lot of reasons to get your car or home loan preapproved before you go shopping, but it mostly comes down to peace of mind. Having your financing lined up first, and knowing how much you can afford to borrow for your loan, allows for a more stress free buying experience. Here are three major benefits of a preapproval:
Stay on Budget: Getting preapproved for a loan is the best way to stay within your budget, and in some cases help figure out your budget. While you can use online calculators to help you determine your payments, the calculators can’t take into account your full financial situation. Working with your lender at your favorite financial institution allows for all factors to be considered. Once you know exactly what your budget can support, you will be confident while shopping knowing that the dream car or home you choose is one you can afford. After all, you would hate to fall in love with a car or house only to find out you can’t get a loan for it or afford the payments.
You Can Shop Around: When it comes to auto loans, having a preapproval gives you the ability to shop around without needing to have your credit pulled multiple times by different dealers to see if you qualify. This is important because having your credit pulled multiple times can lower your credit score.
Shows Your Serious: Having a preapproval in hand, especially when you’re looking for a house, shows the seller that you are a serious buyer, and not a just curious buyer. This means a seller will be more likely to sell to you when they know the financing is ready to go, because the seller will know the money is ready and waiting. Also, when it comes to home buying most realtors will not even agree to work with you until you have a mortgage pre-approval first.
What Happens If You Change Your Mind?
Nothing! If you get preapproved and decide you’re not ready to buy a home or car that’s okay. There is no obligation to preapprovals; most simply expire after about 30 days. If you decide you are ready at later point in time, just ask your lender to be preapproved again.
So what does preapproved mean? Being preapproved for a loan simply means you are making sure you can get affordable financing for your vehicle or house. Getting a loan preapproval is an important step in your car or home buying journey.