Loan Basics. Why a pre-approved loan?

Thought it is tough to get a loan from a bank? Not if you are one of the customers to whom banks offer pre-approved loans. Financial institutions do their own math to come up with ‘pre-approved’ loans for some customers. All types of loans — home, vehicle, personal, etc. — are available through this window from private sector and even government-owned banks.

Some direct selling agents, on behalf of banks, too offer pre-approved credit cards and loans to customers. Which of these should you take, if at all, and what are the advantages in doing so? Also, in which scenarios will it be suitable to opt for a pre-approved loan?

You have a long association with your bank as you’ve been maintaining your salary account there and use a credit card or loan from the same institution. This means that the monthly inflows and outflows from your account are carefully tracked by your bank.

Depending on such cash flow analysis over the years, the bank decides to offer you a loan which it assumes you will be able to comfortably repay.

So, when you get an official call from your bank executive or if your net banking site indicates that you are eligible for a pre-approved home or auto loan, should you take it?

Let us say you have been hunting for a house and have zeroed in on a property that you like a lot and want to buy it. Further, you also have the down payment amount ready with you.

In such a scenario, you will need to quickly get into action as the builder may have many other willing buyers. A pre-approved loan is just right for such a situation.

Now, a pre-approved loan does involve documentation. But the entire process is much faster than a regular loan application process, since the bank itself has indicated your eligibility amount and is aware of your cash flow and transactions.

So you can quickly get the loan sanctioned and move in to your new place.

This is especially useful for ready-to-move-in properties. The sweetener would be if the property that you have chosen is already on the approved list of the bank, in which case the documentation time is further reduced as legal clearance, etc, would already be in place.

The other advantage you would have with a pre-approved loan is the ability to negotiate on interest rates. Since the bank itself is interested in lending to you based on your track record, you can ask for better interest rates, especially for high-cost personal or auto loans. That would mean that your chosen car or the upgrade that you have planned to do to your house becomes that much cheaper.

Your bargaining power is enhanced if you have already repaid a loan that you took from your bank, never defaulting on even a single EMI.

Pre-approved loans work best in the above-mentioned scenarios. But don’t presume that pre-approved loans are the best deal you can get. To offer it, the bank takes into account only the transactions that you have made with it. Other factors matter too. You may have other investments that bolster your repayment capacity. Your cash flows may be a lot better than what your bank has assumed.

Therefore, the loan amount calculated by your bank may not be the highest or the most optimal. Another point to note is there’s a lot of mis-selling happening around pre-approved loans.

A telephone call from an agent indicating that you have a pre-approved loan or credit cards from banks or financial institutions is not equivalent to the official word from your bank.

Often times, there are complaints that these agents try to sell or cross-sell other products as pre-conditions for availing these loans.

So, you might well be asked to buy an insurance policy or a unit-linked product along with the loan, which not only adds to your expenses, but also poses the risk of you being saddled with an unsuitable investment.

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