The ABCs of pre-approved loans

"Congratulations sir, you have been sanctioned a pre-approved personal loan of Rs. 5,00,000. All you need to do is contact our nearest branch to complete a few simple formalities."

Baffled by such a call from a pesky telemarketing executive? Well, you sure aren't alone. Almost every day banks use telemarketing executives to sell pre-approved loans to prospective borrowers. So do such loans actually make sense and how minimal are the formalities? Here are the several finer points of a pre-approved loan you must look out for to decide if it is actually worth it.

Pre-approved loans and credit record:
From the secured home and car loans to the unsecured credit card and personal loans, pre-approved loans exist for all. So how do banks pre-approve a loan, even without having a look at your documents?
The answer lies in your past credit track record. Banks judge your eligibility on the basis of the various accounts you may be holding with them. For example, if you have a salary account with the bank, it makes it possible for them to know the salary drawn, the liquidity in your account, if any loans are being serviced with late payment fees, and your cash outflow. Credit cards, too, give an insight into your finances. Put simply, a savings account plus a credit card with a bank gives a clear picture of the amount of loan you could be eligible for and your behaviour towards debt.

Pre-approval does not imply guaranteed sanction:
Though you may have been made an offer for a loan, the bank is under no obligation, and sanctions are purely subject to successful verification of all relevant documents. So in reality, the requirements of a pre-approved loan are quite similar to a regular loan. You would still be required to provide your bank your account statement, your PAN details, salary slips and tax returns details. If you are already an existing customer with the bank, this procedure could be a bit easier as they already would have the information.
For all secured loans, banks would do a check as required on the property, asset quality etc. It will sanction and disburse the loan only if it fits the banks' pre-determined criteria.

Costs involved:
Though often sold as low interest rate loans, pre-approved loans do come with a fee attached. Banks charge a pre-approval loan processing fee.

So should you consider such offers?
Pre-approved loans are in reality no different from the regular ones. In a way we could also consider it as a means by which banks cross-sell products to their customers. Hence, they could get a bit pushy in this regard. Nevertheless, it pays to do your bit of assessment before taking any decision.

The pros:
Availability of discounts: Look out for the discounts. Most banks offer a discount on the interest rate of a pre-approved loan.

Quicker loan processing: With the bank already having most details about your finances, the time taken to process the loan is generally lesser.

Negotiating with your seller: Having a pre-approved home loan in your hand sure does give you an edge when it comes to negotiating with your seller. The builder is aware that your finances are ready and you are a genuine buyer as pre-approved loans are available for a specific period only.

The cons:
Fixed time-frame: Pre-approved loans are valid only for a certain period of time. So if you have been offered, say for example, a pre-approved home loan, you need to shortlist your home at the earliest. The money is not released till you have selected the property and have all the formalities in place.

Additional processing fees: You end up paying processing fee twice in cases where you don't use the pre-approved loan within the valid time and you later opt to get it approved.

Questions to ask yourself when such loan offers are made to you:

1. Do I really need the loan? Do not go in for it simply because you have been offered one. Remember, every loan comes at a cost. So if you really don't see the need, stay away from it.

2. Does the pre-approved loan offer any extra benefits? Of course, such loans do have their share of advantages as mentioned above. Nevertheless, do a comparison with a regular one and see if you save on the cost.

3. Is the loan amount right for me? Banks pre- approve loans on the basis of your credit history and any previous loan repayments. So the amount approved may actually not be as per your requirement. The first step in this regard is to decide on the loan amount on the basis of your requirement and not because a certain amount is being offered to you.

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