Dubai: Are you looking for a new vehicle, home or even a personal loan? If so, you may find yourself frequently notified of being ‘pre-qualified’ or ‘pre-approved’ for getting funds from different banks – before you even went ahead and applied for the loan. Why is that and what does it mean?
Contrary to popular belief, loan terms like ‘pre-qualification’ and ‘pre-approval’ aren’t necessarily sure shot signals from a bank that you will get the money. While it is considered as a first step towards securing a loan, it only means the lender has reviewed the current state of your finances.
“When you're ‘pre-approved’ for a loan, the bank conditionally agrees to lend you money, but it doesn't mean you’re guaranteed to get the loan and the lender is not obligated to offer you a pre-approved amount,” explained Anil Pillai, a Dubai-based banking industry analyst.
“In most cases, however, they will usually only reject your application if they find out that the information you gave was incorrect or unearth something on your credit history that makes them wary about lending to you.”
When you're ‘pre-approved’ for a loan, the bank conditionally agrees to lend you money, but it doesn't mean you’re guaranteed to get the loan
Pre-qualifications and pre-approvals the same?
Both being pre-qualified and pre-approved for a loan are early steps in the home or car buying process, and it means you have met at least some of their requirements, which includes your income, bank account information and a potential loan and payment amounts, among other factors.
“Your lender will review your submission and run a credit check to determine how likely you are to make your loan payments on time. The pre-qualification credit check is typically what’s known as a “soft inquiry” that will not hurt your credit scores,” explained Joseph Paul, an Abu Dhabi-based banker.
“Unlike pre-qualifications, pre-approvals typically require a ‘hard inquiry’, which temporarily lowers your credit scores. The lender may also ask for salary slips and the process may take up to 10 days. The pre-approval letter will include more details about the offer, such as amount and interest rate.”
‘Hard inquiry’, which require your permission for a thorough check into your credit history, commonly take place when you apply for a mortgage, loan or credit card, and you typically have to authorise the check.
Unlike a ‘hard inquiry’, a ‘soft inquiry’ only involves looking at your credit report at the surface and doesn’t involve a thorough investigation. For example, your report might be checked to verify your identity or to see if you fit within a certain demographic for marketing purposes.
So, although similar in definitions, obtaining a pre-approved offer is a slightly lengthier process than getting pre-qualified as it requires a more exhaustive investigation of the borrower’s credit history and other financial information.
What are the risks with a pre-approved loan?
As a pre-approved loan is offered to you based on the bank’s assessment of your creditworthiness even when you have not applied for a loan yet, these offers are valid for a limited period of time, and the timing may not necessarily coincide with your requirement of a loan.
“Also, if any discrepancy is found in your documentation, the application can be rejected. As pre-approved only signifies your eligibility for loan, and not instant approval and disbursement, check the interest rate for regular before accepting a pre-approved loan,” added Pillai.
“So while it's good to apply for pre-approval at the start, it’s better to apply with more lenders to ensure you get the lowest interest rate you can. But keep in mind a credit card preapproval doesn't affect credit, but a preapproval for a home or car loan causes a minor drop in credit score.”
A key upside, however, is that a preapproval helps you gauge your likelihood of approval for new credit, and the interest rate you could receive. So a mortgage pre-approval can not only help you gauge how much home loan you can afford, it can vindicate your case as a serious homebuyer.
“If you have an urgent financial emergency after agreeing to the pre-approved amount, will you still be able to afford your home or car? So review your budget to determine what works best for your financial situation before you decide how much of the loan you want to take on.”
Verdict: Should you take a pre-approved or pre-qualified loan offer?
Although pre-approved loans are not very different from pre-qualified loans in their nature, they differ from other loans because you’re not the one reaching out to your lender. On the contrary, it’s the other way around; it’s an offer to you from the lender.
This means that the lender already has an offer for you before you apply to borrow funds. Such loans are often offered to customers who have previously availed of a loan from a lender and have maintained a good track record in repayment.
“It helps to take a pre-approved loan primarily because of competitive interest rates. This means that you pay lower interest than you would otherwise pay for that same amount of loan. This brings down your monthly instalments, which helps you afford your needs,” Paul added.
“Also, when you’re offered a pre-approved loan, the lender has already evaluated your financial standing and credit history in detail. This means that the processing time for the loan is short, and the disbursal is quick. This justifies your case to take a pre-approved loan with minimal risk.”