Pre-approved loan: Here's everything you need to know about it

Many of us have must received an SMS from banks stating that “Congratulation’s your pre-approved limit for debit card EMI-loan is Rs 1,00,000. Take advantage and get a free Amazon voucher worth Rs 1,000”. While such offers may sound enticing, pre-approved financial products or pre-qualified loans are very common.

What is a pre-approved loan?

In simple terms, a pre-approved loan is “a loan offer” based on your creditworthiness. Banks make such loans to prospective borrowers assuming that certain pre-determined terms and conditions are met.

Loans that have been pre-approved can be secured, such as home loans or auto loans, or unsecured, such as personal loans or credit card loans.

Before making you an offer, banks evaluate your financial situation and ability to repay the loan based on any past loans you may have taken or on how you handle your credit cards. If your financial situation is sound, you will be offered a pre-approved loan.

That said, pre-approval does not imply that the bank is now obligated to provide the applicant with a loan. It is basically a bank offer. It does not ensure that you will receive the loan regardless of what happens. You must still follow all of the required processes for obtaining a loan. The eligibility criteria depend entirely on the lender’s risk tolerance and the amount of information available about the borrower.

How is a loan processed?

As with any other loan, the bank will conduct minimal creditworthiness, identification, and verification checks.

There are also property assessments in the case of house loans. One significant advantage is that a pre-approval loan proves your creditworthiness, which expedites loan disbursement because the financing institution is already aware of your financial situation.

In home loans, the time required for sanction is significantly reduced because the bank has already verified the borrower’s eligibility and credit rating and only the second stage of property evaluation remains.

Pre-approved loan offers typically include competitive interest rates. This means that you pay less interest than you would on a similar loan. This reduces your monthly EMIs, allowing you to meet your financial obligations more inexpensively.

What is the paperwork involved?

Pre-approved loans require authentication and verification to be completed satisfactorily before the loan may be granted. Pre-approved personal loans require minimal documentation, including identity proof, Proof of residence, PAN card, Bank account statements of the last six months, and IT Return for the last three years.  In the case of secured loans, such as home loans, you will be required to submit property documents, clearing certificates, and tax receipts – in short, everything associated with a typical home loan.

A person with a low CIBIL score cannot be approved for a pre-approval loan, as they may be in default on other loans from various banks. Pre-approval loans are always subject to terms and conditions, and they are not guaranteed.