Pre-approved loans are very similar to regular loans in terms of the nature of credit, with the key difference lying only in the initial process. In a normal loan scenario, the customer typically approaches the bank or financial institution. However, with pre-approved loans, it’s the bank that reaches out to the customer with a loan offer. This means that the bank already has an offer for the customer.
Any bank offers pre-approved loans to those customers who have previously taken loans and maintained a good track record in terms of repayment. Still, creditworthiness is thoroughly evaluated by the bank before finalizing the loan.
From a customer’s perspective, it might feel tempting when the bank approaches him, but it’s essential to remember that there’s no such thing as a free lunch. Ultimately, the lender charges interest and other fees associated with the loan.
“A pre-approved loan is ‘an offer for a loan’ based on your creditworthiness. Banks are ready to provide a loan to potential borrowers, subject to the fulfilment of certain predetermined terms and conditions,” Adhil Shetty, CEO, BankBazaar.com, said.
Pre-approved loans come in two types: secured, covering home loans and auto loans, and unsecured, encompassing personal loans and credit card loans.
Always remember that even if a loan is pre-approved, it does not necessarily mean that the bank is now bound to give that loan to the individual.
It is merely an offer from the bank. It is only an indicator of his or her eligibility to get a loan. The pre-approval does not guarantee that the customer will get the loan no matter what. He or she still needs to go through all the required procedures that are involved in getting a loan.
Pre-approved loans come with their own set of advantages and disadvantages. Here are some of the pros and cons of such loans, according to Shetty of BankBazaar.com.
Pros:
Quicker loan processing: Since the banks have already done a check to determine the loan eligibility before approving the loan, the time taken to process the loan is much shorter.
Availability of discounts: Often, banks offer a time-bound special interest rate on pre-approved loans.
Negotiation power: Having a pre-approved loan implies that the customer is a serious buyer, and this gives him an edge with the seller while bargaining for the purchase, whether a home or a car.
Budget: The customer also has a good idea of his or her eligibility, so he or she knows how much is enough to invest in a house or a vehicle. This will help the individual short-list choices and prevent him or her from overshooting the budget.
Cons:
Fixed validity: A pre-approved personal loan comes with a validity for a certain period, usually 6 months in the case of home loans. So if the customer is not able to purchase within that period, he or she stands to lose those benefits.
Additional processing fees: If the loan is not opted for within the validity period, the customer will need to pay something extra to have the loan re-approved.
The actual rate of interest that is applicable will be as per prevailing conditions at the time of actual disbursement and not what is stated in the pre-approval intimation. Even a small increase here could mean a world of difference, especially in the case of long-term loans like home loans.