“Congratulations! You Can Receive a Pre-Approved Loan” But What Is It?

How often have you received this message - “Congratulations! You Have Been Shortlisted for a Pre-Approved Personal Loan of AED 500,000.”? Almost everyday? Have you ever given it a thought as to what exactly is a pre-approved or a pre-qualified loan? Do you believe you automatically qualify for the loan if you get this message?

Confusing, right? This write-up is here to clear all your confusions. So, read on to know more about what exactly is a pre-approved loan.

Pre-Approved Loan: An Overview

 When you receive a 'pre-approval' for a loan, it signifies that the bank has provisionally agreed to extend a loan to you. However, it's important to note that pre-approval does not equate to a guaranteed loan offer, and the lender is not bound to provide the pre-approved amount.

Typically, the lender will only decline your application if they discover inaccuracies in the information you provided or come across something in your credit history that raises concerns about extending the loan to you.

Pre-Approved and Pre-Qualified Loans: Are They Same?

Becoming both pre-qualified and pre-approved for a loan constitutes the initial stages of your journey toward acquiring a new home or car. These milestones signify that you've satisfied certain criteria set by the lender, encompassing factors like your income, financial account details, potential loan figures, and projected payment obligations, among other considerations.

Upon receiving your application, your lender will carefully assess it and perform a credit evaluation to gauge your likelihood of meeting your loan obligations punctually. The credit check involved in pre-qualification is typically categorised as a 'soft inquiry,' which does not adversely affect your credit scores.

In contrast, pre-approval typically necessitates a 'hard inquiry,' a credit check that can temporarily reduce your credit scores. Additionally, the lender may request documentation such as pay stubs, lengthening the process to potentially span up to 10 days. The pre-approval letter you receive will provide more comprehensive information about the loan offer, including the loan amount and interest rate.

While their definitions bear resemblance, securing a pre-approved offer involves a somewhat more time-consuming procedure compared to obtaining pre-qualification, as it necessitates a thorough examination of the borrower's credit history and other financial particulars.

How Does the Bank Assess If You Qualify for a Pre-Approved Loan?

Receiving a pre-approved loan offer signifies that the bank has assessed your creditworthiness and extended this offer without your formal application. However, it's important to note that these pre-approvals come with a limited validity period, which may not align with your actual need for a loan. Additionally, your application could be denied if any discrepancies are discovered in your documentation. It's crucial to understand that pre-approval only establishes your eligibility for a loan, not an instant guarantee of approval and funds disbursement. Therefore, it's advisable to review the interest rates for regular loans before accepting a pre-approved offer.

While initiating the pre-approval process is a wise step, it's even wiser to consider multiple lenders to secure the most competitive interest rate available. It's worth mentioning that obtaining a pre-approval for a credit card won't impact your credit Score, but obtaining one for a home or auto loan may result in a minor decrease in your credit score.

A pre-approval serves as a valuable tool for assessing your likelihood of obtaining new credit and the potential interest rate you may qualify for. For instance, a mortgage pre-approval not only helps you estimate the amount of home loan you can comfortably afford but also positions you as a serious and prepared homebuyer.

Pre-Approved Loan or Pre-Qualified Loans - What Works the Best?

While pre-approved loans share similarities with pre-qualified loans, their distinctiveness lies in the fact that, unlike other loans where you initiate contact with the lender, pre-approved loans are initiated by the lender themselves. In essence, it's an offer extended to you by the lender.

This entails that the lender has already prepared a loan offer for you before you even submit an application for funds. Typically, these types of loans are presented to individuals who have previously borrowed from the lender and have consistently demonstrated responsible repayment behaviour.

One compelling reason to consider a pre-approved loan is the opportunity for more competitive interest rates. This translates to lower interest costs compared to what you might encounter with a regular loan of the same amount. As a result, your monthly instalment payments become more manageable, making it easier to meet your financial obligations.

Furthermore, when you receive a pre-approved loan offer, the lender has already conducted a thorough assessment of your financial status and credit history. This results in a shorter loan processing period and faster fund disbursal. This solidifies the case for opting for a pre-approved loan, with minimal associated risk.

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Written By: Tanvi Pathak