Pre-approved Loans: Offer a Better Rate of Interest..!

Pre-approved loan is a testimony of one’s creditworthiness and it makes things simpler when he gets closer to a deal.

However, pre-approved loans can also easily make you a debtor, that too unnecessarily.

In-principle approval..!

By providing a pre-approved loan, a bank is giving a customer in-principle approval to take a certain amount of loan, based on his income, financial commitments and creditworthiness.

This will give the borrower an insight into how much loan he is worthy to receive.

 In case of a home purchase, a pre-approved loan helps a customer plan his budget better.

A pre-approved loan also provides a sense of urgency to identify a property and clinch a deal as there is time limit for the loan.

A customer, who has been procrastinating a deal for some reason or other, will now have to act quickly.

Pre-approved loan - Processing...!

The processing of the pre-approved loan is similar to that of an usual loan. The customer will have to furnish documents, including bank statements, income-tax returns and salary slip.

But one need not have to give details about the property, car or / equipment he is buying. Usually a customer gets a few months time to clinch a deal.

Having a pre-approved loan makes the deal easier as part of the loan process is already over. There will be no worries as to whether the customer is eligible for such a loan amount or not.

 If the bank refuses to offer the desired loan amount after identifying a property, he will have to run around for the remaining amount.

Save a lot of time..!

Mr. Arnav Pandya, a certified financial planner said, “One can save a lot of time when the deal is actually made. You do not have to give your personal and financial details at the time of the deal and wait several days for approval,”

In some cases, the builders/promoters or sellers will be willing to negotiate better and offer a better price as they presume him to be a serious customer.

Offer a better rate of interest..!

Some of the banks also offer a better rate of interest for a pre-approved loan as this comes as an offer.

Moreover, if the interest rates are in an upward trajectory, this helps the customer lock the loan at an attractive rate.

But Mr. Pandya begs to differ. “I have seen many cases in which the interest rates offered by the bank are either the same or slightly higher. A customer will have to see whether he has any rate benefit while going for a pre-approved loan,” he said.

However, there is flipside to the concept of such loans. “A pre-approved loan can lead to unnecessary borrowing if a person does not maintain financial discipline,” said Mr. Pandya.

Availability of a loan can make your car, gadgets and consumer durables look old. A person who does not have financial discipline may take to unnecessary upgradation of cars and gadgets or even go on a holiday if a loan is easily available.

The loan comes with a time limit and if not taken within that limit it would lapse.

Many people rush to clinch a deal within the available time & end up with a bad deal.

Processing charges...!

In case the loan lapses, the customer will have to forego the processing charges, which can be 0.25% to 0.50% of the loan amount. For Rs. 30 lakh loan, the processing charges can be upwards Rs. 7,500.

“The bank assesses pre-approved loan amount based on the customer’s account and transactions. This may not include any additional income the customer has.

Documents like income tax returns, given at the time of processing, can give the bank a better idea about the customer’s repayment capability. But unless the customer asks to increase the amount he is eligible for, most of the banks retain the assessed amount,” said Mr. Pandya.

When Rejected?

The bank need not give the approved loan amount fully if it is not impressed by the property, car or other equipment he is buying. It still has the right to refuse financing or bring down the amount as per its assessment.

Even if it approves a particular property or car, the full approved amount will not be available. The customer may get 70% to 90% of the amount as per the prevailing loan-to-value ratio.

The bank can also reject another loan when a pre-approved loan’s validity is on.

For example, if the borrower applies for a personal loan when he already has a pre-approved home loan, it might get rejected.

Locking the loan at a particular rate can be useful in a scenario when the interest rates are going up. But the situation can be reverse if the interest rates are falling.

In short, a customer has to assess his own need for a loan, the time limit available and the rate of interest before going for a pre-approved loan.

By offering a pre-approved loan, the bank is not doing a favour to the customer. It might be cross-selling or / meeting its own target of advances.

Src: Ms. Sangeetha, FC

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