Who does not like easy money, especially when you are getting without making any effort? The answer is many people get tempted when they hear the phrase “pre-approved loan” from a customer service agent. However, what they don’t understand is what lies behind the term “pre-approved.”
What does it actually means?
First of all, to clear the air, there is nothing like a pre-approved loan, mainly in the world of personal loans. It is just a sale gimmick played by the banks to trap customers.
As human beings, the moment we get a call from banking personal stating that you are selected to get a pre-approved loan, we instantly feel privileged. Banks are just waiting to hear a “yes” from the customer. But what they don’t provide is the complete information of what goes behind the whole process. As a customer, it is your right to know about what you are getting into. You need to introspect carefully to understand as to why the banks are offering you a loan, despite the fact that you have never applied. In other words, you should be fully aware of what goes behind pre-approved loans.
In lending terminology, pre-qualifying for personal loans means that a customer is eligible to get a personal loan if they agree to pursue. However, there is a thin line between being approved for a loan and actually getting it. Customers often feel that being pre-approved means that whenever they require, they can easily get the loan credited in their banks. But the reality is different. Pre-qualifying means that you have qualified the first stage of the loan process. Disbursing the loan to the customer is still at banks discretion.
Please note that pre-qualification process works the same way as a regular loan interest. All the determiners are similar. The only differentiator is that the eligibility process is done prior, whereas, in regular loan request, the qualifying procedure takes place once the request is received.
Where does it begin?
Banks have easy access to your financial information like your income, credit history, your current banking status, etc. Since you have better scoring on the parameters; you are given preference over other customers. Depending on your need, you can say a “yes” or a “no”. But you need to understand that nodding in favour of the loan does not mean that bank is guaranteeing you a loan. Based on your documents and other financials, banks can approve or deny the loan. It is an open offer and you have cleared the first level of the loan process.
If a customer agrees to take the loan, they would now have to go through the second stage of the process, which is documentation. Even in the case of pre-qualified loans, customers need to provide basic documentation like photo ids, address proofs, income proofs, bank statements, etc. Banks or other non-banking financial companies may or may not charge a small processing fee. It completely differs from bank to bank.
Benefits of taking a pre-approved loan
Being a pre-approved customer does have its own merits as well. The only reason a customer gets pre-approved for a loan is that they have a clean credit history, without any spots. However, most of the time, customers are unaware of the importance of being a pre-qualified customer. Here are some benefits that you can ask from the bank the next time you receive a call.
- Negotiate on interest rates – The reason banks are calling you to take a loan is that you are a beneficial customer. Banks get an opportunity to earn from you if you agree. Customers can agree to the loan, however, they would also need to pay a high rate of interest. But, they can actually make pre-qualified work in their favor. In order to become a potential customer for the bank, you can negotiate with them for lower interest rates in return. If the bank is keen to make you as their customer, they may offer you a lower rate of interest, which is a win-win situation for both the parties
- Takes less time to process – Since, you have already cleared the first level of loan procedure if you agree to take a loan; the overall processing time would reduce. This is primarily because the background checks have already been done for you. So, the only remaining step is to provide documents and getting approved for the loan. In online loan application, candidates can upload the documents on the website itself to make the process faster.Nowadays banks are very active to provide loan to the customers in less time and would like to set it as a target for others so in this case they do pre-approval of loans easily so that they can also a customer and customer also get benefit as they get instant fund.If you see banks like Axis Bank, they provide Axis Bank Personal loan to the consumer instantly if it is pre-approved or pre-qualified.
- Can compare offers – Pre-qualified customers do have an edge over regular customers. These customers are often bombarded with offers and quotes from different banks and even get the opportunity to check the loan terms before agreeing for the loan. Borrowers can approve or decline the offers at their own prudence. In these cases, borrowers often go with banks that are ready to negotiate and make an offer with them.
So, if you have worked really hard to maintain a good credit status, might as well use it your favor. Banks also appreciate individuals with excellent credit history because, with them, the risk is low or better, negligible.
What’s in it for banks?
Banks are smart and know how to turn people around with money. By pre-qualifying the customer, they are generating the need for the customer.
We all are aware that banks also have certain targets to meet in a year. In order to meet these targets, banks call customers to make offers.
Banks usually make money by lending money in form of loans or credit cards at a high rate of interest. These interests generate earnings for them and they can only charge interest if a customer borrows money from the bank. They also need to ensure that the money they lend is paid back time as well. Banks have access to all the financial information about an individual today. The data is collected and distributed from various sources that help these financial companies to assess the credibility of a customer. They are aware that if a person has been paying their current loans properly and are earning well, are a good candidate to offer loans. That is the reason, customers receive calls that banks have selected them to provide a loan.
Word of caution
Personal loans are very tempting because of their ease of availability. Every time you apply for a loan, your credit rating gets evaluated. The more hard inquiries are made, the more ratings are affected. So, click on “Apply now” only if you need it and not just because it has popped up in your screen saying “you are pre-approved for a loan.”
Also, a person needs to know that a loan needs to be repaid as well. Taking a loan may be easy, but repaying can be tough. If you are already tied up in other financial commitments, you might not have enough room to add another commitment. This way you are only adding more burden every month. Therefore, no matter how alluring these offers may be, take only with utmost care.
Important facts to know about pre-qualified loans
Pre-qualifying a loan is just a preliminary step in a loan process. Many customers may have certain doubts about being pre-qualified. These facts may help in clearing the doubts if any:-
- Being Prequalified does not impact your credit ratings – In the credit scenario, there are two aspects, hard inquiries, and soft inquiries. Hard inquiries are made when a potential lender evaluates credit score of a customer when applied with them. However, soft inquiries can be made by a consumer or a company to check the credit score. Too many hard inquiries can affect your credit score, whereas soft inquiries do not have any impact. In the case of pre-qualified personal loans, it does not affect your credit ratings, unless you formally apply for it.
- No guarantee of the loan – Often people get confused with the term prequalified. For many people prequalified means that banks are ready to transfer the money in their accounts. But the reality is the opposite. Without a doubt, the reason you are prequalified is that you have a good credit history. However, after reviewing the documents, financial companies may deny the loans, the reason could be any.
Do you want to become a pre-qualified customer?
If after reading the above benefits, you think that being pre-qualified is beneficial, you can actually work towards it to improve your chances of being pre-approved. Pre-qualification process is conducted to check the creditworthiness of the customer and how likely the customer is going to repay the loan. In a lending scenario, it is a very important parameter because lending and borrowing work on give and take phenomenon. Therefore, for banks, it is highly significant to know the repaying capacity of the borrower. Customers with bad credit history or even fair credit history usually struggle a lot to qualify for a personal loan. However with little effort and correcting a few things, even these customers can eventually become a low-risk prospect for the bank.
So, if someone is planning to take a loan in near future, they must start working on the improvement procedure as soon as possible:-
- Keep a regular check on your credit score – it is important to be on top of your credit scores. Your credit ratings play a major role in determining you as a low risk or a high-risk customer. This is the first checkpoint for banks to get a better picture of your repaying capabilities. So, if you have had a bad credit history, you can definitely work on improving the credit scores. Having a good score improve your chances of getting a loan or a credit card in future.
- Manage credit – The only reason you are low on your credit scores is either you are not making timely payments for your financial commitments, or you have a long revolving credit or even not utilizing your credit properly. Whatever might be the reason, it can seriously impact your credit scores. Therefore, it is important that you manage your credits carefully.
- Make timely payments – This is the best way to improve your credit ratings. Timely payments of your dues have a positive impact on credit scores. Therefore, if you have had long outstanding, it is time to clear them and move your credit ratings upward.
- Resolve fixed issues – You could have made some mistakes in the past that have hampered your credit scores. But, now you have become responsible enough to clear the mess you had created. You were able to clear all your pending dues; however, it is still appearing on your credit sheet. In order to resolve the issue, you need to contact the credit bureaus and get your scores updated by filling a CIBIL Online Dispute Resolution Form. It usually takes 30 days to resolve the issue. It is imperative to get the reports corrected to increase your chances of getting a loan or a credit card.
These are few ways through which a person can boost credit ratings. The crux of the matter is that you should always be on top of your game in every aspect of your life and credit rating is one of them.