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Do Inquiries for Pre-approved Loans Affect CIBIL Score?

Wouldn’t it be great if you could get a pre-approved loan? It would enable you to avoid the time-consuming loan application process, the hassle of submitting necessary documents, and what not! The answer is an astounding “No”.

Pre-approved loans appear to an irresistible deal from the surface. However, in reality, it is often not so because there is more than meets the eye. The lack of awareness about the concept of pre-approved loans makes prospective borrowers accept pre-approved loans without understanding its consequences on their CIBIL score. Yes, you read it right! Pre-approved loans do affect your CIBIL score adversely. Now, let’s understand the concept of pre-approved loan.

What is a pre-approved loan?

You may have received pop-up notifications of pre-approved personal loan after you’ve checked your account balance at an ATM or have just withdrawn cash. If you access your net banking or mobile banking account, these messages must have followed you there as well. Mobile phones have made us more accessible. Therefore, you may have also received messages from banks and financial institutions and phone calls from telemarketers asking you about your requirement for a loan. Pre-approved loans are a part of a bank’s promotional initiative to push up their sales for loans.

However, offering such loans in abundance would reflect negatively on a bank. Therefore, banks and financial institutions carefully enlist their prospective borrowers from existing customers, based on their positive debt repayment history, number of existing loans or credit cards against his/her name, and other essential factors. This data is proof of his/her creditworthiness. It enables banks to analyse the prospective borrower’s timeliness for repayment of loans and credit card bills, and decide on his/her loan eligibility.

Pre-approved personal loans enable borrowers to tide over unforeseen personal or medical emergencies, enable long-standing repayment of dues or serve as a cover for a loss of a job. Personal loans are usually the most preferred option for meeting suddenly rising financial constraints because of easy documentation and fast disbursal procedure. Pre-approved loans are not just offered on personal information, though pre-approved loans are mostly personal loans. Pre-approvals can be offered on two types of loans – secured and unsecured. Secured loans refer to home loans, while unsecured loans imply personal loan, credit card, etc. Pre-approval on credit cards are usually limited period offers. The required documents usually are Bank Statements, salary slips for the last 3 months, PAN card, proof of residence and proof of identity. The documentation procedure is quick because the individual is an existing customer of the bank, and hence, the latter does not need to follow an elaborate process to check the prospective borrowers’ identity.

Hard Inquiries vs Soft Inquiries

Inquiries about pre-approval of loans can be broadly classified into categories – hard inquiry and soft inquiry.

Soft inquiries :

Such inquiries are only tracked by customers and do not include requests for a CIBIL report. This will not be visible to lenders and does not affect the CIBIL score. Lenders pre-approving a loan for a line of credit or accessing a prospective borrower’s CIBIL report also account for checking his/her credit history during loan application process.

Some instances of soft inquiries are:

  • Checking CIBIL score, free or paid
  • Management services that specialise in keeping a tab on an individual CIBIL score

Hard inquiries :

A hard inquiry may occur during loan and credit card applications. When a borrower actively applies for a loan after receiving info about a pre-approved loan, the concerned lender may use the soft inquiry that had been pulled earlier. At other times, lenders may also track the credit history of the loan applicant by accessing a new CIBIL report, which accounts for a hard inquiry.

One Hard inquiry usually does not prove to be detrimental to the applicant’s CIBIL score. However, several hard inquiries will have a significant impact on the CIBIL score. Despite the effect of consumers’ hard inquiries on his/her CIBIL score being low, it is visible to prospective lenders through the CIBIL report for two years. Several recent inquiries made by the applicant are interpreted as credit hungry behaviour, arising from financial constraints. This raises a red flag for the lender, cautioning them against approving a loan application. Needless to say, a loan rejection reduces the CIBIL score. This is applicable to pre-approved loans as well. Some instances of hard inquiries are:

  • Retail credit accounts
  • Credit cards
  • Car loans
  • Mortgage applications, etc.

Impact of pre-approved loans on CIBIL score

Not all pre-approved loans have a negative impact on CIBIL score. Let’s discuss the varied impact that pre-approved loans can have on your CIBIL score.

  • Frequent hard inquiries indicating financial duress: From the above discussion on hard inquiries, it is apparent that the term ‘pre-approved loan’ is misleading. It does not mean that the pre-approved loan that you have received is actually pre-approved. These loans are targeted by lenders at existing customers, based on their good health and creditworthiness. It does not imply that a pre-approved loan does not follow the usual loan application approval process that is applicable for other types of loans. Hard inquiries, i.e. inquiries made by the applicant edit history by viewing his/her CIBIL report may negatively affect the his/her CIBIL score, if the report has been accessed several times within a short span of time. But accessing it too frequently is interpreted as credit hungry behaviour arising from financial stress. This may become the reason behind the rejection of the pre-approved loan application, reducing the CIBIL score.
  • Pre-approved loan application rejection: As pre-approved loans do not literally mean that the loan has been approved and confirmed by the lender, it exposes pre-approved loan applicants to similar chances of rejection. Such loans are offered to existing customers simply on the basis of parameters like current income, credit history, etc. In case the pre-approved loan application is rejected by the lender due to other factors, it will definitely impact the CIBIL score of the applicant negatively.
  • Paid credit repair services: Such services account for a hard inquiry and have an adverse impact on the individual’s CIBIL score.

FAQs on Do Inquiries for Pre-approved Loans Affect CIBIL Score?

What are the benefits of getting a pre-approved loan?

The below are the advantages of getting a pre-approved loan:

  • Negotiating power – The fact that your bank has offered you a loan without you having applied for one, places you in a commanding position where you can bargain on the loan amount, rate of interest being offered, loan tenure and other loan terms.
  • Quicker and hassle-free – A pre-approved loan is only offered by banks to a chosen few from their existing customers on meeting some set criteria. Being existing customers, the bank already has proofs of their identity. Therefore, the scrutiny wouldn’t be as stringent as for a new loan applicant who is not an existing customer of the bank. For some pre-approved loan applications that have been approved, the loan amount can be disbursed within a span of a couple of days.
  • Low interest rates – Pre-approved loans may be offered at an interest rate lower than the usual rate for personal loans because these are a part of the promotional activities undertaken by banks to push their loans.
  • Financial support during emergencies – Pre-approved loans often serve as an effective option for funding sudden personal and medical emergencies. What adds to this benefit is that these can be repaid through easy EMIs, further contributing to the convenience.
  • Added benefits – As pre-approved loans are offered to existing customers, the applicants are eligible for special benefits like easy EMIs, partial repayment options, waivers on processing fees, discounts, etc.

What are the factors that banks consider before offering a pre-approved loan?

Some of the dominant parameters that banks consider before offering pre-approved loans are:

  • Credit history and CIBIL score
  • Timeliness of debt repayments to the bank
  • Your eligibility for a loan amount based on your existing income
  • Your eligibility based on the amount remaining from your salary after the debt repayments that are pending against your name
  • A robust balance in your Savings Account reflects your financial discipline, further boosting your chances of being offered a pre-approved loan

What are the required documents for pre-approved loan application process?

Pre-approved loans are offered by banks to their existing customer, based on a few set criteria. As these customers have already undergone a thorough background check when they make the loan application, approval process is quicker and simplifies the documentation, when they were new customers of the bank. Hence, the scrutiny process during pre-approved loan application is not as stringent. This makes the process less hassle-free and time-consuming.

The required documents are:

  • Bank statements
  • Salary slips for the last 3 months
  • Proof of Identity (PoI)
  • Proof of Address (PoA), and
  • PAN

Does a pre-approved loan mean that the loan has been confirmed without me having applied for it?

The term ‘pre-approved loan’ is misleading. It does not literally imply that the pre-approved loan that the existing customer of a bank has received is actually pre-approved and confirmed. Banks evaluate the creditworthiness of the prospective customers, based on their credit history, accuracy of loan repayments to the bank till date, income, remaining income after debt repayments, etc. These parameters reflect on their credit health, and indicate at the prospects of timely repayment of the pre-approved loan, if they are offered one.

It also does not mean that a pre-approved loan does not follow the standard loan application process that is applicable for other types of loans applications. The only difference from the usual loan application procedure is that the process for pre-approved loans is quick and hassle-free because they involve less documentation. This is because the loan applicant is already an existing customer of the lender, and therefore, does not require as much scrutiny as applicable to other loan application approval process.

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