The secret of pre-approved loans and their implications.
There is more than just one type of approval for personal loans. Pre-approval is a convenient type of approval that can give you an idea of how much you're able to borrow. However, just like there's different of approval there are also different types of pre-approval. This guide will take you through what you need to know.
What is pre-approval?
Pre-approval is where a bank or lender says they are willing to consider you for a loan. You can request to be pre-approved for a loan or you may receive an unsolicited offer from a bank. A pre-approved loan is an offer of a certain loan amount pending full approval. Pre-approvals are available with all kinds of loans, including home loans, personal loans and car loans. Pre-approvals are nothing more than indications that the lender is willing to approve your loan once you submit a complete application. They usually remain valid for about three to six months.
What lenders offer pre-approval?
|Bank of Melbourne||More|
What you should know about the pre-approval process
If you have received communication from your current bank that you've been pre-approved, then this process does not apply to you. The bank has used information available to them to determine that you may be eligible for one of their products. The following process is for when you're seeking pre-approval.
- You'll fill out a loan application and provide the lender with the relevant documents concerning your financial condition
- The lender will review the documents provided in the preliminary assessment
- The lender will give you a quote highlighting the amount they're willing to provide, along with the rate of interest chargeable on the loan.
It is worth noting that in many cases, pre-approvals take place online within just a few minutes. This is because the lender, the lender’s credit assessment team or the lender’s insurer has not evaluated the pre-approval. For this reason, the lender is under no obligation to approve your loan formally once you submit the completed application. So, on-the-spot approvals are often nothing more than indications.
What types of pre-approval are there?
- Conditional approval to existing customers.
Banks have huge amounts of data on their customers and many use this to make pre-approval offers. This may come up in the form of a suggestion at the teller – "did you know you're eligible to increase your credit limit?" – to products appearing on your Internet banking.
- Self-sought pre-approval.
Many lenders offer pre-approval with personal loans, especially car loans, to help borrowers check how much they can borrow without submitting a formal application. Pre-approved car loans can also help you know how much you have to spend when you're purchasing a car.
- Bad credit pre-approval.
Sometimes, people with bad credit scores could also receive pre-approvals from lenders, but the terms and loan amounts could vary based on the circumstances of the borrower. Be sure to check the nature of this offer before you accept because several less-than-reputable lenders operate in this space.
How do pre-approvals affect borrowers?
When banks send out unsolicited pre-approvals, it can encourage people to take out loans or credit they may not necessarily need. Just because you are eligible for a loan doesn't mean that you should necessarily take one out. If you seek out pre-approval yourself, it can help you feel more confident when making a purchase. You'll know that a lender is likely to lend you the funds you need. In addition, pre-approved loans give borrowers an estimate of their purchasing limits and can speed up the loan application process.
Owen is offered a personal loan
A few years ago, Owen took out an unsecured personal loan with his bank to buy a second-hand car and take a holiday. He'd been repaying it over the past four years and was coming close to paying the whole thing back. One day he received an email from his bank offering another personal loan. The email mentioned that not only had he been making his repayments on time, but that his financial position meant he had been conditionally approved for another personal loan.
Owen was in a good financial position. He had a joint savings account with his partner as they were both saving for their first home, and had approximately $30,000 in savings. Apart from his personal loan, he had no other credit products with his bank, and so no other debts. He considered the email and while the offer for the personal loan was tempting, Owen was happy to be almost out of debt. He also didn't need to finance anything else. He declined the offer and continued to repay his loan.
How do banks and lenders identify customers they need to target with offers of credit?
Banks and lenders possess quite a bit of information about their own customers. They use this knowledge to promote various products and services. For instance, you might have an account with a particular bank. Consequently, the bank has a lot of information about you — from your earnings to your expenses, the bank will be aware of your interests and spending habits. Based on this information, it will be very easy for the bank to make enticing offers to catch your attention. This is why banks often send mail-outs, emails or even phone calls regarding new products and conditional approvals to their customers.
What documents do you need to submit to the lender to obtain pre-approval?
- A completed and signed application form
- Identification documents
- Proof of income e.g. payslips, tax returns etc.
- Proof of expenses
- Details of assets, liabilities and debts e.g. credit cards, loans
- Proof of deposit
- Credit history and,
- Proof of employment
Are there any conditions for providing pre-approvals?
Lenders provide pre-approvals based on the following conditions:
- The information supplied is accurate
- Your personal and financial details can, and have been, verified
- If you're applying yourself, you've provided the lender with all the relevant information needed for verifying deposits, securities, assets, income and liabilities
Yet, meeting these conditions does not guarantee a pre-approval, either. Lenders often decline applications for any of the below reasons:
- You haven't supplied the proper documents for validating your income
- You have a low credit rating
- There are numerous enquiries on your credit file
- Changes in your personal circumstances, for instance, a change of job
- Changes in the policies of the lender after offering the pre-approval
- The interest rate has increased and you're no longer eligible
- Expired (or worthless) pre-approvals
Things to watch out for
Pre-approvals are marketing tools that are used by banks and other lenders, and while it can give you access to credit you may need, it can also encourage you to take out loans you may not require. Having a pre-approval also does not mean that the lender will readily give you the funds you require. Oftentimes, lenders have an approval process that is more rigorous than the pre-approval process. If you don’t clear the actual approval process, you could find yourself in a very sticky situation. This is especially so if you sign a contract agreeing to purchase a vehicle expecting the bank to lend you the funds you need.