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Why a loan approved in principle might get declined

Just because your loan application is approved in principle doesn't mean you will receive the money. A loan approved in principle might get declined after all, for reasons ranging from changes in your circumstances to errors in your credit record.

What does "approved in principle" mean?

Getting "approved in principle" for a loan means you've been conditionally accepted based on your application and a soft credit check. This is also called "provisional approval." It shows a lender might offer you a loan.

After this, final checks are needed to ensure you meet the lender's criteria. This includes a hard credit check and more income details for affordability assessment. Only if you pass these checks will you actually receive the loan.

What's the difference between "approved in principle" and actual approval?

If you've been approved in principle, this will have been based on details like the last three years of your address history, employment information, and personal details.

This will help lenders decide whether to give you a loan în the first place, but it does not guarantee your acceptance.

An "approval in principle" isn't a final commitment, so you can't hold the lender accountable. The approval comes after a hard credit check, which looks at your debts and loan repayment history to make a final decision.

While being approved in principle is positive, you should wait for the final approval before getting too excited.

What can I do with approval in principle?

Having a loan approved in principle is helpful for several reasons:

  • Budgeting: It gives you a clear idea of how much you can borrow, helping you set a realistic budget.
  • Speeding up the process: An approval in principle shortens the loan application process, making it quicker and easier to move forward.
  • Reassurance: If you've had credit issues in the past or have bad credit, an approval in principle can give you some much-needed reassurance about your loan approval chances.

An approval in principle is especially useful when applying for a mortgage:

  • An approval in principle makes it easier to show real estate agents and sellers that you are a serious buyer.
  • An approval in principle also strengthens your position during negotiations with sellers, showing that you have already taken steps towards securing financing.
  • And, again, speeds up what can be quite a lengthy process.

Why would an approval in principle fail?

Here are some common reasons why an approval in principle for a loan, credit card, or mortgage may not end up in an actual loan approval:

  • Changes in financial circumstances: If your situation changes between the approval in principle and the final application,
  • Credit history issues: if the lender found something negative in your credit report that they weren't aware of.
  • Valuation concerns (for mortgages): If the property valuation is lower than the initial mortgage offer. The mortgage lender won't give you a mortgage higher than the value of your property.

These are not the only reasons – it's best to ask your lender and understand precisely what happened before you try re-applying. Making too many credit applications in a short amount of time can hurt your credit score.

What can I do if my loan approval in principle gets declined?

If you don't get approval in principle to begin with, don't stress – the rejection won't show up on your credit report and won't hurt your credit score.

But if you did get approval in principle but then got your actual loan application rejected, you need to be careful not to hurt your next application's chance of approval.

Here is what you need to do:

  • Talk to the lender. You need to understand what happened and why your application was denied.
  • Offer a larger deposit. This way, you'll owe them less and will be less of a risk.
  • Ask for a smaller loan or credit limit. This, again, limits how much the lender has to lose.
  • Don't apply for a new loan straight away. It might be tempting, but making too many loan applications in a short period can hurt your score. Experian recommends not more than two hard credit checks every six months.
  • Finally, and most importantly, take some time to improve your credit score. This could be as simple as checking that all of the details on your credit report are correct or registering on the electoral roll, or you might need to spend some time paying off old debts.

Another way to improve your credit score is to download a credit-building app like Wollit. Wollit is a unique app that reports your monthly subscriptions as loan repayments. This helps you build a good history of paying on time without the concern of having yet another loan or card application declined.

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