What is a pre-approved loan? Should I take it?

A financially strong and creditworthy borrower attracts the attention of lenders, as these borrowers are more likely to repay their loans and not default. So, instead of waiting for financially strong borrowers to approach them for a loan, the banks themselves approach these borrowers with pre-approved loan offers.

Should you accept a pre-approved loan offer? How should you evaluate the offer? Let’s find out.

Pre-approved loans

Pre-approved loans are often accepted in principle by the lender and subject to compliance with eligibility standards and applicable terms and conditions. With pre-approved loans, banks usually know the creditworthiness of the borrower. For example, they know their credit score and income. However, they may still require documents such as an ITR statement and latest proof of income to verify repayment capacity and current income status. The bank can offer you a pre-approved loan which can be a secured or unsecured instrument. For example, you may receive an offer for a pre-approved home loan, car loan, bicycle loan, personal loan, etc.

Who receives the pre-approved loan offer?

Bank account holders or borrowers with loan accounts and high creditworthiness are more likely to get a pre-approved loan offer. Some pre-approved offers are time-limited and expire after a certain period of time. A pre-approved loan is mainly offered to people with a high credit score, no default history, high income according to the RTI or if they maintain a large balance with the bank.

Pre-approved loans vs regular loans

In the case of a pre-approved loan, the bank already has information on the applicant’s eligibility. On the other hand, in the case of an ordinary loan, the bank first receives the loan application and then verifies the eligibility of the applicant. The provisional loan limit, interest rate and fees are already disclosed when you receive a pre-approved loan offer, whereas in regular loans the loan amount is unknown at the time of application. It depends on factors such as credit rating, age of the applicant, existing debts, etc. If you don’t accept a pre-approved loan, it doesn’t affect your credit rating. But applying for other loans will have a small negative impact on your score.

How to check pre-approved loan offers

Banks and financial institutions usually inform their customers through different channels like emails, WhatsApp messages, SMS, on customers’ mobile/online banking platforms, etc., and the bank’s customer support team can also call you. You can also access a loan aggregator online where all your pre-approved offers can be listed in one place.

Can the pre-approved loan be rejected?

Although pre-approved, a loan can still be rejected by the lender. The loan may require the presentation of certain documents by the borrower. Failure to do so within the prescribed time may result in the loan application being rejected. Banks usually offer a pre-approved loan based on the information they already have. Suppose that during the due diligence, the bank finds a substantial difference between its data and the information provided by the applicant. In this case, the bank may refuse the loan even though it has been pre-approved. For example, a pre-approved loan may be rejected for a recent job change, a sudden drop in credit score, deterioration in financial capacity, change in bank criteria, property not approved during bank due diligence, etc.

Advice before accepting loan offers

It would be good to only accept a pre-approved loan offer when needed. Never get a loan facility just because you qualify for it and can get it easily. Before accepting the pre-approved loan, compare the interest rate, term, fees and applicable terms with similar loan products offered by the same institution and with other lenders. Accept the pre-approved loan only if you find it similar or superior to another bank’s offer. Finally, make sure the offer is from a legitimate source such as a bank or NBFC. Beware of scammers who can lure you via text or email with fake loan offers.

(The author is CEO, Bankbazaar.com)

Dorothy H. Lewis