When you set out to get a car finance agreement in place, the words ‘approved in principle’, or AIP, will come up – but what does that mean?
When it comes to car finance, approved in principle means that the finance provider has tentatively agreed to provide a finance deal after reviewing your application and basic financial details. It’s a first look at your finance history, including credit score, employment status and income. This initial process is known as a soft credit check.
In essence, an AIP is a preliminary decision showing that the lender is willing to commit to the loan depending on the results of further checks and conditions. These checks and conditions often include the following:
Document verification: Lenders will need to verify the personal and financial information you provided.
Vehicle checks: Lenders will likely need to assess the value and condition of the vehicle you’re interested in buying to ensure it matches their lending criteria.
Credit and affordability review: A more in-depth review of your credit history and affordability assessment may be conducted.
While an AIP is a good indication that you are likely to be approved for the loan, it’s still possible that the deal may fall through if there are any issues during the final checks and hard credit check.
Now you have a better understanding of what approved in principle means, let's take a look at the differences between ‘approved in principle’ and ‘approved’.
The key difference between the two is that an AIP is an early-stage conditional acceptance whereas full approval is final and unconditional, meaning that once all the credit checks are complete and you’ve met the criteria, the lender is happy to proceed with the agreement.
Affordability checks
Before you can be fully approved for the agreement you will need to undergo an affordability check. This is a detailed assessment of your financial situation which helps the lender decide whether you can be relied upon to comfortably make the repayments without being put at risk of financial difficulty.
The affordability check is carried out once you have been approved in principle by the lender and is a vital step in confirming whether you will be approved. The lender will look at the following:
Income: Lenders will verify your income using pay slips, tax returns or bank statements.
Expenses: Lenders will examine your regular outgoings and work out how much disposable income you have after essential living costs.
Debt and existing financial commitments: Lenders will review any current loans, credit cards or other financial commitments.
Credit history: Lenders will check your credit history to assess your overall financial health, looking for missed payments, defaults or a history of financial difficulty.
Employment stability: Lenders may assess your employment status to ensure you have a steady source of income.
Future financial changes: Lenders will check if there are any known upcoming changes to your financial situation.
How important is ‘Further information is needed for confirmation’?
If, during the process, the lender states that ‘further information is needed for confirmation’, this means that some key details need to be verified before the loan can be approved. This step is critical if the loan is to get the green light and it’s importance cannot be overstated. If further information is not provided (the lender will tell you what they need) it may result in the agreement being rejected.
You have been fully approved, what’s next?
Once you have been fully approved for your car finance agreement, congratulations! Now you’ve reached the fun part and you can actively start the process of buying your car. At this point you will have a clear understanding of your budget and will know how much the lender is willing to finance, meaning you can focus on cars within your price range.
Firstly, don’t panic if you don’t get approved for finance at the first stage. Your credit score won’t be affected by a soft credit check and it won’t be seen by other lenders. There are some steps you can take if you’re not approved this time around that can help you improve your credit score and boost your chances of being successful in future:
Review the reason for denial: This will help you understand what needs to be different in future applications.
Check your credit report: You can request a copy of your credit report through agencies such as Experian and look for any errors, late payments or outstanding debts that may have had a negative impact.
Review your financial situation: If the issue was down to affordability and you’re able to, explore ways to reduce your existing debts or cutting back on your outgoings. While not a quick fix, this will make a huge difference in the long run.
Offering a larger deposit: If you’re able to, saving up and offering a larger deposit to the lender could increase your chances of being approved. If that’s not an option for you, consider asking for a smaller loan so that the existing deposit you have is a larger overall percentage of the total.
Read next: Is it hard to get car finance?
