What does ‘approved in principle’ mean?

There’s nothing quite like getting that notification and seeing the word ‘approved’ after submitting a car finance application.
 
But before you start celebrating and picking out your dream wheels, take a moment to double-check whether you’ve been granted a final approval or been approved in principle.
 
Being approved in principle is usually the first step in the car finance journey. It means that you’ve met the lender’s initial eligibility criteria and they might be able to offer you a loan.
 
It doesn’t mean that your car finance is guaranteed. Your approval will be based on the details you supplied in your application form and a soft credit check, but it can still be withdrawn.
 
You’ll still need to undergo final checks to make sure you match all the lender’s requirements before your car finance offer is official and you can sign on the dotted line.

What’s the difference between ‘approved in principle’ and a final approval?

 With an approval in principle in place, you can breathe an initial sigh of relief – there’s a lender out there who might be willing to offer you a loan. It’s an important first step, but don’t forget there’s still a way to go until you reach the finish line.
 
You can only be sure that you have a guaranteed offer once you receive a final approval. This step takes all your information into consideration and usually means you’ll have to undergo a hard credit check too. This hard search gives the lender access to all the secrets of your credit report so they can see exactly how much debt you already have and how well you manage your loans.
 
If you’re still a good fit for the lender once all these details have been reviewed, you’ll likely be offered an agreement.

What happens after in principle approval?

Once you have an approval in principle, what happens next is completely up to you.
 
You’re free to walk away, make a new application with a different lender, or forget about getting car finance completely. As you’ll only have undergone a soft credit check at this stage, your credit score shouldn’t be impacted and you’re under no obligation to proceed, even if the lender has approved you in principle.
 
If you do decide to move forward and go to the next stage, you’ll need to commit to a hard credit check. This will remain on your credit report for up to two years, so it’s not a decision to take lightly. If you change your mind after the hard search takes place, you could end up negatively impacting your credit score.
 
You’ll also likely need to supply supporting documents to back up the information provided in your initial application.
 
These documents will usually include:

• Proof of address – such as recent utility bills or a Council tax statement
• Proof of ID – such as a passport or full UK driving licence
• Proof of income – such as three months’ payslips or bank statements

What happens next if I’m not ‘approved in principle’?

Nobody enjoys rejection and the sting of not receiving an approval in principle can be painful.
 
Don’t let it dampen your dreams though; one rejection doesn’t mean it’s the end of the road for your car finance journey.
 
An initial application with a soft credit search shouldn’t affect your credit score or have any long-lasting effects on your chances of approval.
 
You’re now free to apply with another lender or car finance broker or take some time to improve your eligibility before trying to find a loan again.

More car finance guides

• What does being pre-approved for car finance mean?
• HP vs PCP: Which is right for me?
• What is Hire Purchase (HP) finance?
• How does Personal Contract Purchase (PCP) finance work?

How can I improve my chances of being ‘approved in principle’?

While different lenders have different eligibility criteria, there are steps you can take to improve your chances of finding the right car finance loan for you and securing that all-important approval in principle:

Improve your credit score

If you’ve missed payments in the past, your credit score could probably do with some TLC. Happily, credit scores are never fixed, and you can make changes to improve yours. Consider registering on the electoral roll, keeping your credit utilisation percentage low, and limiting the number of hard searches you have in a short time period.

Put down a large deposit

Larger loans represent a higher risk to lenders. If you can put down a large deposit upfront, you’ll likely need to borrow less and can reduce the associated risk. This might make the lender more willing to offer you finance, even if you don’t meet their ideal borrower criteria.

Choose a cheaper car

Just like putting down a large deposit, choosing a cheaper car can reduce the amount you need to borrow and increase your chances of finding a lender who is willing to take that risk. You may also be able to reduce your monthly repayments so that the loan fits your affordability.

What sorts of things are checked for this ‘approved in principle’?

When determining whether you can be approved in principle, the lender will carry out checks to make sure you meet their initial eligibility criteria.
 
This will usually mean they check:

• Your personal details
• Your address history
• Your employment information and income
• Your current debts
• Your payment history – including any missed payments or debts in arrears
• Your affordability – how much you can afford to put towards a car payment each month