Obtaining preapproval for a bank loan has both advantages and disadvantages to the prospective borrower. In reality, it depends on the circumstances of the preapproval and whether or not you end up eventually using the loan. The credit rating agencies treat particular kinds of preapproved loans different from others. Furthermore, be aware that getting preapproved does not obligate you to accept the loan.
According to the credit reporting agency Experian, preapproved offers of credit do not affect your credit score, provided you did not apply. You must initiate the application yourself for your credit score to be affected. Therefore, if a bank notifies you that it has preapproved you for a loan for which you did not apply the effect is the same as your established creditors who periodically review your credit history to protect their accounts. These inquiries are ignored by the credit reporting agencies as well as by the FICO credit scoring system.
Fair Isaac Corp., owner and creator of the trademarked FICO score, states that credit inquiries affect different people in different ways, depending on the person's unique credit history. For example, the shorter the credit history, the greater the impact an inquiry will have. As far as FICO scores are concerned, the system omits multiple auto, mortgage and student loan inquires in the most recent 30 days before scoring to account for the fact that consumers often shop around for the best interest rates on a major loan such as a mortgage. They then treat multiple inquiries for one type of loan in a short time as one inquiry at the next scoring.
When it comes to a mortgage, having a bank preapprove you for a loan has distinct advantages. In a SmartMoney article dated Aug. 6, 2009, Lisa Scherzer wrote that the housing crisis had resulted in real estate agents and home sellers not wanting to deal with potential buyers without a preapproved loan. Also, being preapproved for a mortgage lets you know what price range to look at when shopping for and buying a new home.
Using the Loan
Accepting a preapproved bank loan and making timely payments over the long term will improve your credit history. If the preapproval is for a mortgage loan, be sure the financial institution is reputable and not a fly-by-night mortgage company. Remember you are not required to accept any preapproved credit for which you did not apply, and even for loans you seek out, nothing is finalized until you sign the contract.
Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of "The Arizona Republic," "Houston Chronicle," The Motley Fool, "San Francisco Chronicle," and Zacks, among others.