Do you know the hidden truth behind ‘Pre-approved loans’ in India
POSTED BY ON May 4, 2015 COMMENTS (44)
Have you ever received a phone call from your relationship manager telling you that, there is a pre-approved loans especially for you?
A lot of people get excited about this fact, that there is a special offer for them and that the bank is ready with the red carpet waiting top hear a – “Yes, I am interested” from them.
However, what’s happening deep down in these cases is often not known to general public. You as a customer should be fully aware of what goes behind pre-approved loans (It’s also called Instant Approval some-times). You should be aware about the reasoning behind lenders offering these type of loans.
What does “pre-approved” loan means?
Let me not reinvent the wheel here. One of the best explanation of pre-approved loans is given by wikipedia. I am quoting it here. You will understand what it means
In lending, pre-approval has two meanings:
The first is that a lender, via public or proprietary information, feels that a potential borrower is completely credit worthy enough for a certain credit product, and approaches the potential customer with a guarantee that should they want that product, they would be guaranteed to get it.
This rarely happens in the financial services industry, and when it does happen, it is usually loaded with fine print that is not immediately disclosed. Usually, what happens is pre-qualification, instead.
Although, to a typical consumer, “you’re pre-approved” means “you already passed the approval process and therefore are guaranteed to be immediately granted the loan if you apply,” the literal meaning is different. The literal meaning is “at a stage before approval.”
Thus, pre-approved creates no obligation whatsoever on the lender and no rights whatsoever to the potential borrower. “Pre-approved” is thus a popular advertising catch phrase to induce people to apply for a loan.
So, in a nutshell, when a lender says that your loan is pre-approved or you are eligible for instant approval, it means that based on your profile information like your income, your payment history till date, your debit/credits in your bank account, your cibil report status and the score and many other things – they have short-listed you and preferred you over other customers.
Few parameters about you are already known to lender and based on that information, you can now apply for the loan. However its not correct to say that the loan is already approved or any kind of guarantee that you will get it for sure.
These offers just means that the first level check is complete and you have passed that, you will most probably get the loan if you move ahead.
But, you still have to follow all procedures
You still have to follow all the procedures, produce all the documents asked and at the end, the final decision will be taken by the lender if they want to give you the loan or not.
An important point to note is that pre-approved loan comes with a time limit. If you get an offer for the loan and if you accept it, you need to close the deal within few months (generally 6 months). You will be paying a processing fees, if its applicable for the instant approved loan.
Advantages of Pre-approved loans
Note that, I don’t want to show pre-approved loans in a bad light in this article. While there are few things one should be aware about, still there are some benefits of pre-approved loans, which you should know
Benefit #1 – Better Negotiation power in your hands
If you have a pre-approved home loan on your side, then you have a better negotiation power in front of builder, you can show him that your loan is already approved and your chances of buying the house is stronger.
Builders love committed buyers and they might extend the discount of few points to you, if they can sense your position. Also you can talk to your lender about anything which is concerning you about the loan and negotiate it with them.
Benefit #2 – Less processing time
Because the loan is pre-approved. Most of the background checks is already done, your basic details are with the lender. Now its all about producing the documents asked and take it to next level. Hence the overall processing time gets reduced and things happen faster.
Benefit #3 – Possibility of Lower interest rates
Most of the times, a pre-approved loan comes with a lower interest rates. This is because of the reasons like its the bank who wants you to take the loan and they have to offer you something interesting.
And the other reason is that pre-approved loans are offered to those who have a good history of payment or who have a stable cashflow and banks don’t mind lowering interest rates to them because they are not high-risk customers.
Pre-approved loans are a tool for cross-selling and meeting of targets by banks
To understand this whole game of pre-approved loans, you just need to think like a lender. A person who already is a customer is a good candidate for other products too. Let’s take an example.
Imagine a customer who had taken a home loan from a bank, and already 1-2 yrs have passed.
Now if you think carefully, you will realise that a person of that profile, might be needed additional money for home furnishing, might want to upgrade his car, might need some money in between vacations, home renovation or might have emergencies in life and above all, this person earns well enough (because he bought a home loan).
Hence, the lender keeps bombarding with offers like car loan, personal loan and other kind offers. So the point to understand is that, these pre-approved loans are a way of cross-selling their other products to you.
Below you can see a screenshot from my mailbox and will understand what I am talking about.
Apart from this fact, another thing is that banks have their internal targets to meet. Each branch of bank is given a monthly or quarterly target to meet and in that pressure, they have to find customers and sell the products.
That’s the reason you will see your relationship officer calling you from time to time to tell you about the “exciting offer” especially offered only to “premium customers” like you.
Role of Psychology in pre-approved Loan
“Supply creates its own demand”
This is the best quote of economics which explains why pre-approved loans work many a times. We live in the world, where are consuming mainly because someone wants us to consume and not because we want to consume it. If you offer something to a big group, chances are, few people from that group will come with all the reasons why they need your product.
Coming to the example of pre-approved loans, if you keep offering the loans to a big mass from time to time, Its highly probable that few of them would take it just because its available.
Consider an example:
Assume, that I have an old car (which I have in reality) and I am thinking to upgrade my car (which, I am not thinking in reality). I have some money in my bank account which can be used for making the down payment. Now at this stage, imagine I get an email or call offering me a car loan saying – “Pre-approved card loan only at 8.99% upto Rs 6 lacs”.
Imagine what will happen….
Even though I was not consciously thinking to upgrade my car, still just because an offer like that is available, I might be tempted to go for it. I will magically come up with all the reasons why I must take the loan, and how I deserve a better car .. blah blah .. The deal will give me an external push and look like a win win deal.
I might not have applied for the car loan myself if the loan offer was not there, because, it was not a lot of pain for me to actually apply for loan and upgrade my car. I will be involved in my life issues and keep postponing my wish.
However, not all examples are like this. A lot of times, people take the loans they don’t need at all. The pre-approved loans make them hungry for something their body does not need. Just because it’s available easily, a lot of people fall for it and get into the never ending cycle of debt a lot of times.
Don’t apply for pre-approved, if you don’t need it
You might be aware that any kind of loan application goes into your CIBIL report. So make sure you apply for the pre-approved loans only if you are really serious about the loan. Don’t just opt for it for the sake of it. Don’t click that “Apply now” button just to check if you are really going to get it.
At the end, I would say do not just discard the pre-approved loan, neither see them with too much of doubt. Look at it as a normal loan offer and do all the checkups and introspect if you really require it or not.
Do you have any experience of getting these kind of offers? Do you fall for them?
there is very less known facts about Pre-approved loans. thanks for covering those all in this article. I would love to read more about pre approved loans from you.
cheers.
Already it has all info . What else you want 🙂
Hi Manish
Nice Article.
interesting articles
Caller: Hello, Sir calling from HDFC bank
Me: Ok
Caller: Would you like personal looo
Me: Cut the call!
Caller: Hello, Sir calling from HDFC Bank
Me: Ok
Caller: Would you like persoo
Me: Cut the call!
Caller: Hello
Me: Cut the call!
Thanks for your comment Partha
My wife has got a land piece as gift from her father. If I take a loan to built a house on the same, what income-tax benefits I may get.
You will not get any tax benefit as the plot is not in your name. Your wife can take the loan
Hi Jagoinvestor,
Guys, please come to Chennai to conduct the Workshop. We are eagerly waiting for you!
Will soon come for that
Nice article. Valuable info. Thanks for sharing.
Thanks for your comment Suresh Dugar
Hello Manish, Nice article. These days I get 2 to 3 calls daily for pre-approved home loan, personal loan, some trading firm providing its call services, etc. Worst part, when I say ‘no’ these people ask for a reason.
“Worst part, when I say ‘no’ these people ask for a reason ” ROFL
It is understandable. However, you are well within your right not to oblige them.
How ever, please see if you can logically answer them. Can you explain them the rationale behind your decision. For this you need to think of your needs and goals. If you have a clear goal and think through the chatter, it will help clarify your ideas and boost your financial acumen.
Hahaha ..
Very good information. Thanx for sharing.
Thanks for your comment Alok Singh
Education loan at 14 % and car loan 12 % . Need I say more ..
Sad times we live in…
Good point
Manish- Rigghtly said..
“””””Don’t apply for pre-approved, if you don’t need it “””””‘else u will end up paying interest.. the same amount u can use for other purpose.
**********Try to leave your life Interest free as much as you can*****
Last sentence of your comment is not from ‘Book of Economics’ but from ‘Propoganda of a Cult’.
Thanks for your comment ZameerAhmd
Now a days the bank having my account and cc card getting crazy.
HDFC is calling me day and night for loan,offer and other things despite refusing them repeately.
I think they have hired some third party to call the customer who don’t have any idea.If you ask any question then they would refer you to their manager.
Why they don’t make Home Loan more economical despite RBI have now deducted the charges.
Hi VINNI
Thanks for your sharing your valuable comment on this topic. Please keep sharing your views in future also
Manish
Hi Manish,
Nice article :).
I am a regular reader of you article respective to Home Loan.
I would request that you have some work shop in Bangalore respective to Home Loan please.
Regards,
Amit
Hi Amit
We will plan a workshop around July/Aug time in Bangalore
Thanks it was a helpful article.
Thanks for your comment Nitin
Nice article Manish.
After a long time u had written =-O =-O
I didnt get 🙂
The screenshot you share doesn’t even seem to be from ICICI bank ( different sender, etc.). It seems like someone spamming you to get leads/affiliate money.
Yes, its not exactly from ICICI . but I guess it gives the idea about the thing I am talking about 🙂
Interesting.
Loans from any financial institutions costs one. The rates are generally disguised to be not very apparent. They are generally 6-8% higher than the bank FD interest rate. In addition there are charges like processing charge and prepayment charge etc.
Thus to the extent possible, loan for wants(say white goods etc) is to be restricted, unless one has a clear plan and resources to pay back.
Also, one needs to be cautious of the words that are used. Your esteemed self, your exalted excellency are nice to hear. But one should take these(and other jargon like esteemed customer) are to be taken with a pinch of salt.
The real trick is to use the bank for one’s need rather than getting used by bank.
Hi Srinivas
Thanks for your sharing your valuable comment on this topic. Please keep sharing your views in future also
Manish
Nice article manish. In my case , i took a home loan 3 years ago and got married one year ago. I received so many calls in last 1 and half year for pre approved loans. I wanted to furnish my home in just one shot but instead of taking easily available personal loan i chose to go slowly on the requirement month by month. After 1 year i am happy that i didnt fall in lucrative pre approved personal loan offer. I think if it’s not an emergency and unavoidable situation , we should not go for it. But its an individual choice as priority and lifestyle differs person by person.
Thanks for your comment sudhank
Hi Jagoinvestor,
Guys, please come to Bangalore and conduct the Workshop. We are waiting for you!
We will be there around Aug time
Nice article.. Bajaj finance and hdfc bank both were offering me personal loans but while enquired there processing charge were very high and there was no negotuations … Prepayment penalty was high
..
Hey anuj
Thanks for sharing your experience with all of us.
Manish
Hi Manish,
This is an awesome article and an eye opener for many people.
I think the thumb rule is if there is a genuine requirement, then one should go for any loan, pre-approve or normal. If no requirement, then what is the point to take such loans? by doing this one will simply help the banks to make more money and we will lose.
Thanks for your comment Manidipa