So, you get a call from your bank, and they tell you that you are eligible for a “pre-approved loan” . Sounds like good news, right? Perhaps, or perhaps not. A pre-approved loan may sound like a big deal, an opportunity that you shouldn’t miss for anything, but in reality there is a lot going on behind the scenes. While a pre-approved loan generally means good terms and interest rate, there is still a possibility of rejection before actual finalization.
What is a Pre-Approved Loan?
When a bank offers you a pre-approved loan, it means they believe you have high creditworthiness, and are thus willing to prefer you over other customers for a personal loan, house loan, etc. Generally, only those customers are considered for pre-approved loans who have a promising credit history, high credit score, and a track record of timely payments.
There are usually two types of pre-approved loans- secured and unsecured. While the former are home loans and car loans in most cases, the latter are credit cards and private personal loans.
Even though a pre-approved loan sounds like a big deal, it really isn’t. Even if you have been offered one such loan you have to follow the standard procedure and submit necessary documents still, if you want the loan.
A Pre-Approved Loan May Not Necessarily be Fully Approved
Banks generally offer pre-approved loans to their existing customers only. However, they can also pre-approve a loan for you just on the basis of your transaction history, balance, and income. This is not a confirmed pre-approval, because they will check your CIBIL score, and the CIBIL report as well, before finalizing the loan. This is done after you have showed interested in taking the loan, and want to go through the process. If in future your bank finds out that your CIBIL score is not up to the mark they might reject your loan.
Advantages of Pre-Approved Loans
Even though you should be careful about pre-approved loans, as they might appear quite enticing but are risky nonetheless just like ordinary loans, they do have some advantages. These are:
1) Upper Hand
One of the best advantages of a pre-approved loan is that you have the upper hand. Your bank already believed you are an ideal candidate, and so, you have all the power in negotiation. You can request for changes in the loan terms and conditions so that they are in line with your comfort and convenience. You can, or rather should, also negotiate on the interest rates.
2) Faster Processing
A pre-approved loan also means that the processing time taken is less. Generally, when a customer submits a loan application the bank has to go through their CIBIL report, payment history, etc. to ascertain the creditworthiness of the person. Needless to say- it is a really time consuming process. However, when your loan is pre-approved then only a limited time is spent on your loan application, since you are already in good light.
Should You Take a Pre-Approved Loan?
Believe it or not, in most cases taking a pre-approved loan is a bad idea. This is because you may feel compelled to take the loan even if you don’t need it. The whole idea of a pre-approved loan is to make you feel special. It makes you believe that you have an advantage that is given to just a chosen few, and giving up on it would be a bad move.
A pre-approved loan is a marketing gimmick which is based on the principle “supply creates its own demand”. Banks often interest their customers in a loan by offering a seemingly great deal, which is made to appear too good to be give up. This is why pre-approved loans are so popular.
Another reason why people find pre-approved loans so alluring is because they like the exclusiveness. If a bank were to offer such loans on a mass level these wouldn’t look so attractive.
In the end, whether or not you should say “yes” to a pre-approved loan is entirely dependent on your circumstances and requirements. If you do have a practical use of the loan then there is no harm in getting it. On the other hand, if you don’t have any use of it, then you should avoid it no matter how attractive it seems.
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