Pre-Approved Loans Pros and Cons

Sep 20, 2011     Posted under: Home Loan

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Pre-Approved Loans: A pre-approved loan is one that is approved for a purpose before the need for it actually arises. The most common are pre-approved personal loans, but home and car loans, too, get pre-approved.

Personal loans are usually pre-approved based on your financial health(balance in your savings account), but in order to get housing loans pre-approved, you would have to go through the paper work  required for a home loan sanction. The only difference is that the bank does not run a check on the property’s title; this is done when the loan gets sanctioned.

The tenor for which such loan is approved varies from bank to bank and you need to pay processing fees here too.

The Benefits

Know Your Budget: While pre-approving a loan, the bank looks at your repay capacity and accordingly fixes the loan amount. This gives you a budget and you have to look for a house accordingly.

Get Discount From Builders: Some builders provide discounts to customers who have pre-approved loans.

Timelines not a worry: Customers often complain about the time banks take in sanctioning a loan. In case of pre-approved loans, there are no such problems.

The Drawbacks

Meet deadline for house hunting: Even though you are required to do complete paper work, the loan remains valid only for a particular timeframe. For instance, while SBI pre-approves a home loan for two months, Kotak Mahindra Bank Ltd pre-approves for six months. It is possible that you do not get the house of your choice in the stipulated period. Then the loan agreement gets cancelled.

Pay Processing fees twice: In case you are unable to use the pre-approved loan within the stipulated time and get it approved again, you would have to pay the processing fees again.

Loan Amount May Wary: When calculating the loan amount, banks consider your repaying capacity at the prevailing interest rates. However, interest rates may change during the pre-approved tenor. If that happens your eligibility for a particular loan amount may also change. In fact, banks factor in interest rate changes every month and accordingly keep changing your loan amount.

No Guarantee: A pre-approved loan does not provide the guarantee of lending. For instance, if you finalize a house but the bank does not find the property satisfactory, it may withdraw the loan.

NitiN Kumar Jain

Nitin works in an IT MNC professionally but blogs and owns NKJ Live. He is also the co-owner of a professional start-up ARGHAM BYTES

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