Will Pre-Approved Loan Work For You?

They say the less you intend to borrow, keener lenders are to provide you loan.  The pre-approved loans that banks offer are a prime example of this phenomenon. Often, you would have received calls from banks, trying to convince you to take pre-approved loans with lower rate of interests, minimum documentation and faster processing, typically within 48 hours or so. They may also say that these loans are being provided to you as a part of your privilege status with the bank. But here, we will look at the pros and cons of such loans and in which all circumstances should one go for the pre-approved loans.

A pre-approved loan is a slightly differentiated product, usually offered by banks to people with clean credit history.  Banks may also offer pre-approved loans to customers who have sufficient cash inflow and transactions in their salary account. These loans are offered to people before the selection of property or asset (car, holiday, etc.), so that they don’t have to wait for the sanction of loan to finalize the asset. All pre-approved loan come with a certain time limit, let’s say 3months or 6 months, to select and finalize the asset for which loan is required.

Now, the bottom line – Do pre-approved loans make sense? If yes, at all, then for whom? As banks typically extend such offers only to existing customers, the processing of pre-approved loans is less time consuming and documentation is simpler. However, in terms of charges, the pre-approved loans are just like any regular loans.  

In addition to the above mentioned operational easiness, pre-approved loans raise your bargaining power as now you have the finances and can give it right-a-away. On the other hand, pre-approved loans have certain pitfalls that need to be considered while availing these loans. Here is the fine print:  

Do You Really Need It?

Pre-approved loans are approved on the basis of repayment record; salary income, etc. Hence, the very existence of loan is bank centric that lure customers for the liquid money. There are instances of consumers availing the option just because they were offered; whereas in reality, there was no need.

Here, the thumb rule is: Do not take loans if not required. Remember, every pre-approved loan comes with a cost, and at the end, you will have to pay for it.

 Further, it is most likely that your pre-approved loan amount is different from loan required during the purchase of property. As pre-approved loans are based on the indicative interest rate and maximum loan availing limit, the scope of further negation with the bank to increase the sanctioned loan amount is limited.

Also, the interest rates fluctuation may change the interest rate of the loan on which you have initially agreed upon. Generally, banks allows you to time horizon of around 3-6 months to find the asset and avail the loan for the same, after which these loans lapses. This time frame may change from bank to bank. For instance, SBI pre-approves a home loan for 2 months; whereas Kotak Mahindra Bank Ltd pre-approves it for 6 months. Here, banks factor in interest rate changes monthly and changes your loan amount accordingly.

Check Interest Rates

Pre-approved loans come with 1-2% lower interest rates than those prevailing in the market. Here, you need to compare between banks and find out the most cost-effective option. In addition, if you have good credit history, you can negotiate the interest rates and/ or other charges further to make cost less.

One important thing in regard to the interest rate is that the interest rate here are floating rates and will change with the interest rate change in the market. Hence, there are chances are you may have taken the loan considering lower interest rate but eventually would end up paying at the rate prevalent in the market.

Pending Documentation

Though pre-approved loans are being sold for easy documentation; however, even for pre-approved loans, banks require all the documents, which are required in regular loans. Here, the only difference is that most of the documents are required at the time of disbursal of loan amount, after the property, car, etc. have been finalized. For the same, most banks put disclaimers on pre-approval loan certificates, stating that all documents should be made available at the time of actual disbursement of the loan, without which pre-approved loans can also be cancelled.

No Guarantee

A pre-approved loan is just a promise and not a guarantee of bank’s lending. Hence, for genuine reasons, the banks’ reserve the right to cancel the approved loan. For instance, if you finalize a house but bank does not find the title of the property satisfactory, it may withdraw the approved loan.

Additional Cost Attached

Pre-approved loans, especially personal loans, come with an additional cost in the form of “pre-approval loan facility charges”. It is for providing the loan assurance before it’s actually availed. As per the RBI directives, the maximum pre-approved loan facility charge can be 1.5 per cent of the total loan amount and most banks cap it to the maximum limit.

So, while pre-approved loans have its merits, ignorance of above mentioned factors could lead to a serious mess. For example, banks put a processing fee on each pre-approved loans, which is valid for a specific time frame. A person failing to identify property in case mentioned time frame of pre-approved home loan would have to get the loan approved again, by paying processing fee again. Moreover, the renewed loan would again have different terms & conditions, which may or may not suit your requirement. Hence, it’s imperative to remember the finer points to make the most of this smart innovation.