It is well known that the less you need to borrow, the keener lenders are to give you a loan. For, the greater the need, the greater the risk of non-repayment. The pre-approved loans that banks offer are a prime example of this phenomenon.
What are pre-approved loans?
You may have received SMSes from banks saying that they have approved a loan of a certain amount for you and that to avail of it, you should contact your branch or send a message from your phone. Pesky telemarketers also send such proposals.
While using your phone to check the details of your credit or debit card, you will often find an automated message stating your eligibility for a loan of a particular amount. Offers of credit cards, too, fall in the same category since the issuing bank is comfortable extending a certain amount of credit to you. Typically, people receive such offers from banks with which they have a relationship—loans, salary accounts and credit cards, among others—and there is often a time limit for accepting the offer. The question is, do these loans make sense?
Types of loans
Harsh Roongta, CEO, Apnaloan.com, says, “Pre-approved loans are generally of two types, unsecured and secured.” The first category is mainly personal loans and credit cards. In the second are car loans, even home loans. Whatever be the type of loan, the in-principle agreement is to extend it to you, provided you accept it and fulfil certain criteria.
Generally, a bank judges your eligibility before offering a pre-approved loan. This is based on your track record with it. For instance, if you have a salary account, the bank will have an idea of your income and cash flow. It could also be based on the amount in your savings account or your servicing of existing loans with the bank. As for your credit card payment history, Roongta says that credit bureau records are usually not taken into consideration by banks when they send a pre-approved loan offer. “Only after you approach a bank and show an interest in taking it (the loan) will they get your credit score from the Credit Information Bureau (India) (Cibil),” he says. For a secured pre-approved loan, banks not only verify if you meet the above criteria but also do an asset quality check. The bank will check the kind of asset you are set to buy using the loan—the type of house or car, for instance. It will sanction and disburse the loan only if it fits a predetermined criteria.
Is the loan really pre-approved?
“A pre-approved loan is no different from a loan you may approach your bank for,” says Roongta. “Just because you have a pamphlet stating that you are eligible for a pre-approved loan does not necessarily mean that you will get it,” he adds. Besides, the loan will be disbursed only if you agree to the terms and conditions and your financial status does not deteriorate after receiving the pre-approved loan offer.
Typically, an offer of a pre-approved loan is a form of what is known as cross-selling in bank parlance. On the basis of the information they have on a particular client, banks try to push him to avail of other products, baiting him in a sense. So, while the bank will pre-assesses your ability to repay, it will lend only after it validates that its assessment?is?correct, not otherwise.
Pre-approval is typically in connection with the process of loan sanction and disbursal, not the costs. For a particular type of loan, it does not make a big difference whether you approach a bank or a bank approaches you. If it makes a difference at all, it is in terms of interest rates. Most of the criteria and terms and conditions remain the same. If your bank offers you a pre-approved car loan, you still need to check whether you can get a better rate elsewhere. But that does not mean that the offer is worthless. You can leverage the pre-approved loan offer to negotiate with other banks. The fact that your own bank has made you a loan offer makes you a potential customer for other banks too.
This is one area where a pre-approved loan may have an edge. Since banks typically extend such offers to existing customers, the processing can be simpler and quicker and the paperwork can be done with a bank representative at a place and time that suits the borrower. If you apply online, then the flexibility is that much more. Taking a loan through the phone has similar merits. The bank already has the PAN, bank statements, proof of residence and most of the other information that is required for a prospective borrower under the Reserve Bank of India’s (RBI’s) Know Your Customer norms. This also helps in processing the loan.
So, the next time you are approached with a pre-approved loan, take it only if you actually need it. A lot of people in debt traps are ruing the day they signed on the dotted line.
What are pre- approved loans?
• The offer is usually from banks with whom you interact
• The eligibility criteria has to be met
• The offer has a time limit
• Approval comes only after checks
• Costs are similar to other loans
• The processing time is less
Some banks may not ask for these documents if you are already a customer
• Income proof
• Salary slips
• Bank account statements
• 3 years’ I-T returns
• Proof of residence
• Identity proof
MAKE THE MOST OF A PRE-APPROVED HOME LOAN
Stories abound of homebuyers missing out on a property they had set their hearts on because the bank took too long to process the loan. You can avoid such a situation with a pre-approved home loan, but it will have to be you who approaches the bank. Kamlesh Rao, vice-president and business head, personal finance, Kotak Mahindra Bank, says: “We give in-principle approvals for home loans to borrowers who have not identified a property yet. The benefit is that the borrower will know the amount a bank is ready to give him.” This helps you figure out how much more you need to raise and you can search for a house accordingly.
The banks check your income and decide how much they can lend. However, the loan is disbursed only after you zero in on a home. Since the loan is for a secured asset, banks will check your credit score with the Credit Information Bureau (India). They have access to your savings accounts, so they will check your last six months’ bank statements. You may have to provide your last three months’ salary slips (see Papers Needed).
After verification, the bank will give you a pre-approved loan sanction letter stating that in-principle approval has been granted for a particular home loan amount. But there is an expiry date—the terms and conditions are usually valid for six months. That, however, is contingent only on the fact that the criteria on which it was based, monthly income, for instance, does not change. Disbursal happens only after the documents and the property are properly verified.
“Kotak Mahindra Bank offers the said interest rate for the sanction validity period, which is one month,” says Rao. “The rate changes later, depending on the option you choose, fixed or floating home loan rate, in case actual interest rates change,” he says. The same is true of other banks too. So, while the loan amount sanctioned remains valid for six months, the interest rate holds only for one.
While a number of banks, such as State Bank of India, do the pre-approval processing for free, others, including most private banks, might do it for a fee which is refunded if the loan is actually taken. Some banks, such as Kotak Mahindra Bank, charge a flat service fee of Rs1,000-2,000. Axis Bank usually refunds the processing fee, while LIC Housing Finance charges Rs1,123 for in-principle approval of loans of up to Rs25 lakh and Rs5,500 for bigger amounts. Most banks say they process the application within seven days.
“In case of a pre-approval, a customer can negotiate with builders from a position of strength since they know that he has the money to fund the purchase,” says Harsh Roongta, CEO, Apnaloan.com. That said, if you cannot zero down on a home within the sanctioned period, you lose the processing fee. Also, remember that the bank will disburse the loan only if the property meets its approval criteria.
Looking to park your long-term capital gains (LTCG) to avoid paying tax? National Highways Authority of India (Nhai) is offering non-convertible bonds with benefits under section 54EC of the Income-Tax Act. The bonds are for a period of three years, with an interest rate of 6.25% per annum. The interest is fully taxable in the hands of the investor. The minimum investment amount is Rs50,000 and the maximum, Rs50 lakh. The bonds can be held in both demat and physical forms. The way to benefit from these bonds is to part LTCG, say, from assets such as property or art within six months of realizing the gains. While short-term gains from a sale made within three years of buying an asset get added to your taxable income, long-term gains (a holding period of more than three years) are taxed at 10% without indexation or at 20% with indexation.
Come September and mobile number portability (MNP) will become a reality. You will be able to move from one cellular service to another within your circle or city (if you are staying in a metro) without changing your number. The first phase, which will cover metros and A circles, will be completed by 20 September. Other circles will be covered in another six months. Regulations specify that the entire process should take two days at the most and during it, the number will not function for 2 hours. The charges are yet to be finalized. According to the authorities, the entire process will be automatic.
Be aware of the charges that need to be paid in unit-linked insurance plans (Ulips). Broadly, charges are levied under four heads. You have to pay some other costs depending on when you plan to withdraw your funds or how you channelize your premiums. The charges include:
• Premium allocation charges: It is an upfront cost deducted from the premium as a percentage of it.
•Fund management charges: It is deducted from the fund value for the management of funds.
•Mortality charge: Deducted from the fund value, it is the cost of providing insurance coverage.
•Policy administration charge: It is levied on the fund value for administration of the insurance policy. It can be a flat charge or vary at a predetermined rate.
A Ulip offers various funds to suit the needs of investors with different risk appetites. A fund’s performance depends basically on the underlying securities, so the returns hinge to a great extent on the funds chosen. Your risk appetite should guide you while choosing funds. There are usually four kind of funds: only equity (high risk); only debt (low risk); balanced fund, a mix of equity and debt (medium risk); and any other specified combination. Any of the funds available could be doing well at a particular time. Remember that track record is not an indicator of future performance.
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