Saturday, May 23, 2009

PRE-APPROVED LOANS ARE NOT REALLY " PRE-APPROVED"

You must have received SMSes,calls from telecallers or letters from banks saying that they approved loan of certain amounts for you. To take it, you should contact your branch, or send a message from your phone to a particular person or number. While using your phone to check the details of your credit or debit card, you will often find an automated message saying that you are eligible for a loan on phone of a particular amount. Offers of credit cards, too, fall in the same category since the issuing bank is comfortable extending a certain amount of credit to you. Typically, people receive such offers from banks with which they have some relationship—loans, salary accounts, credit cards, among others—and there is often a time limit for accepting the offer. The question is, does it make sense to go for them?

Eligibility criteria- Generally, a bank judges your eligibility before offering a pre-approved loan. This is based on your track record with the bank. For instance, if you have a salary account, the bank will have an idea of your income and cash flow. It could also be based on the amount in your savings account or your servicing of existing loans with the bank.For a secured pre-approved loan, banks not only verify if you meet the above criteria, but also do an asset quality check. An asset quality test simply means the bank will check the kind of asset you are set to buy using the loan—the type of house or car, for instance. They will sanction and disburse the loan only if it fits their predetermined criteria.
So how is it different from the normal loans ? Well actually, they are not different at all from them. Its just that here the bank is making an effort to reach out to you and offer you a loan, rather than you approaching the bank.In terms of cost etc there is no difference at all . Sometimes, banks might sweeten the deal by offering processing fee waiver etc but those concessions are generally available to all the customers on negotiation.

Will you definitely get the loan since its pre approved? No . Infact the whole offer is just to entice you to approach the bank. The bank will conduct its due diligence like it does for all cases and only if you meet all their criteria will you get the loan. The pre approved is infact not really approved loan. So you should be prepared to have your loan request rejected or declined by the bank which offered you the pre-approved loan.

Why do banks do it? Banks do it get as many customers as possible. They are driven to run such campaigns out of competition to garner maximum customers. Also since most of the terms and conditions are similar across banks, they try and differentiate themselves by running such offers. But , in reality they are just trying to get customers to approach them for loans.

Is their any benefit at all in this? One area where a pre-approved loan may have an edge is the time taken in processing the loan. Since banks typically extend such offers to existing customers, the processing can be simpler and quicker, and the paperwork done with a bank representative at a place and time that suits the borrower. The bank already has the PAN, bank statements, proof of residence and most of the other information that is required to have an a prospective borrower under the Reserve Bank of India’s ‘Know Your Customer’ norms. This also helps in processing the loan.

Should you fall for it? You should look at these offers with a pinch of salt. You must not approach a bank simply because it is offering you a "pre approved loan". Rather you must do your research properly by shopping around to find the best deal for you in terms of rate of interest charged, penalties like cheque dishonour cheque, late payment fees etc, the repayment period,prepayment penalty etc. Based on all this , you must approach the bank. Pre-approved or not ,you must take loans only from the lender which is offering you the best deal.

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