Pre-Approved Loans- What Do They Mean?

Have you got a call, sms or email from a bank saying that they have pre-approved a personal loan for you? Pre-approval of loans, is a marketing strategy adopted by banks and financial institutions, to enhance their credit disbursal, by cross selling products- in this case loan products to customers based on the existing information they posses of the customer. Pre-approval can be initiated either by the financial institution or the customer. If the financial institution is offering it to you, it essentially means they are cross selling the loan product to you based on your track record with them.

What does Pre-approval mean?

Pre-approval is an in principle approval given by the entity to provide you with a loan of a certain sum provided you fulfil certain criteria. Pre-approved loans are essentially of two types.

• Secured: This includes pre-approved home loan, car loans, auto loans etc.
• Unsecured:  This includes pre-approved personal loan and credit card loans among others

Before offering or giving you a pre approved loan, the bank generally studies your track record. E.g. If you have a salary account, the bank is aware of your cash flows. If you taken a loan in the past, the bank is aware of track record as far as servicing of the loan is concerned.

Pre-approval is an in principle approval and hence it doesn’t mean you will definitely get the loan. The bank is not obligate to provide you with the loan. Loan will be disbursed, if and only if, you’re financial credibility has changed for the worse and you fulfil the criteria set by the entity. Generally, pre-approved loans are valid for 6 months. The only advantage a pre-approved loan has over other loans is that the processing is very quick. The moment you put in your application, processing will begin and you will get your money with hours or a few days which otherwise would have taken several days together.

Lookin for HOME LOAN ?

Does pre-approval mean you can get away with submitting documents?

The requirements of a pre-approved loan are almost similar to that of a loan taken from a bank. When you approach a bank, for say a pre-approved housing loan, it will seek several details from you which would include bank account statement, salary slips, pan card details and income tax returns among several other documents. In case of an in-house customer, the requirements may be a little less purely on account of the fact that the bank already possesses the information.

What benefit does it offer?

• Increase in bargaining power: The very fact a pre-approved loan has been offered to you, means that other banks would also offer you a loan because of your financial credentials which include credit history and cash flow. You can leverage the pre-approved loan offer to get better rates from other banks.
• Personal Loan and credit card loan: A pre-approved personal loan/ credit card loan is best suited for someone wanting cash immediately. It could be for travelling or any medical expense. It will prevent you from borrowing emergency money at abnormally high rates of interest. Credit card loan is normally at a higher rate of interest in comparison to personal loans.
• Home Loan: A pre-approved home loan will enhance the bargaining power of the buyer because he has financial ability to close the transaction. Besides, based on the pre-approved loan amount he will ensure that he looks for property within his budget. Also, you will reduce the chances of losing a house because you were not able to garner the financial resources in time.
• Car and Auto loan: A pre-approved car and auto loan will set a budget for you. So you will zero in on a model that fits your budget. Besides, you’re likely to get a good deal from the dealer because of the fact that you can close the transaction quickly.

If you want a pre-approved loan, make sure you have a sound credit history and a good credit rating. Most financial institutions will seek information from CIBIL- an agency that provides individual credit rating and then decide whether the loan should be pre-approved or not. You may get a pre-approved loan even if you have a bad credit history but be ready for paying a high interest rate.