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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.
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pop-up notifications of pre-approved personal loan after you’ve checked your account balance at an ATM or have just withdrawn cash.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.
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:
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:
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.
What are the benefits of getting a pre-approved loan?
The below are the advantages of getting a pre-approved loan:
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:
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:
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.