Pre-approved loans, did it ring any bell? Most of you must have witnessed this type of loan from your bank after doing an ATM transaction stating –
Dear Customer –
We value your association with us; you are eligible for a new pre-approved personal loan, please click the link below to avail it in 60 seconds. Isn’t it a brilliant idea to attract the clients in seconds? Some of you might be interested while the rest may not agree with it.
Let’s take a walk to understand what a pre-approved personal loan is – They are nothing but a promotional advertisement done by the banks and financial institutions to magnify the sales of Loan products. There can be many reasons for choosing you as an eligible client –
- Your credit score is up to the mark with bank standards.
- Having healthy Credit History and Transaction rate is a win-win situation for extending the offer.
- You can avail an instant cash loan as the bank relies on your repayment ability.
- Your income and expenditure are in line with the creditworthiness.
Let’s know some of the merits of Pre-approved personal loans –
- Instant processing – As you are already eligible for the credit, there will be no extensive verification of your credentials with the bank.
- Edge – Since that bank is coming to you to offer loans, you can negotiate for lower interest rates or ask for customized repayment options.
- Offers and discounts – Amazon coupons, Paytm Cashback, goodies, processing fees waiver, lower interest rates, short-term EMI holidays, festival discounts can be offered to lure you.
Now let’s tune into the demerits of Pre-approved personal loans –
- You are required to be quick to avail them as they are available for a limited period only.
- There is no legal obligation of the bank to authorize your loan. Your application can be reconsidered for validation if there are any discrepancies.
- Keep an eye on the interest rate, it may or may not fluctuate in your favor. Banks can act smart enough in levying the interest.
- Beware of additional charges – additional processing fees, transaction fees, high penalty on partial payments and foreclosures and sign the loan deal wisely.
How to Prepay Your Pre-Approved Personal Loan?
Financial institutions provide its customers with an option of prepayment letting them pay their loan before the date when the credit actually expires. For example, a person has taken a loan from bank ‘A’ and is supposed to repay it in the next 5 years at 15% interest charge. He suddenly realizes an increase in his income that further increases his repayment capacity.
He is thus successful in settling his repayments before the due date. He paid the entire amount to bank ‘A’ at the end of the third year. Now, the question is, is the customer allowed to do so? The answer lies entirely in the hands of the terms and conditions of the bank.
- The cost of lending is always lesser than the client’s cost of borrowing
- A customer availing a personal loan at 15% interest will not have his savings account interest credits more than 9 to 10%
- While he could have earned 9-10% interest and repaid the loan on time at 15% interest rate, the customer saves 5 – 6% extra on making prepayments.
- This may attract some fee by the banks.
1) Prepayment Charges by the Banks
The rate at which the bank takes the loan amount to lend you is apparently less than what you pay the banks. After all, the lending rate minus the borrowing rate is the ultimate profit of the banks. Now when you are prepaying your money, the bank suffers a certain amount of loss. So, should the customer consider prepaying the loan and save their interest expenses? The prepayment charges vary. There might be different restrictions on prepayments depending on which bank the customer goes to borrow. Generally, one has to pay 4 – 5% of the outstanding loan value.
2) How Much to Prepay Personal Loans?
If you find you have additional cash inflows after availing the loan, you may repay the loan either wholly or half of it to get rid of some of the interest burdens. In general, most of the financial institutions let you prepay the loan entirely, while some of them allow in part. While the partial payment attracts no extra charges, the full prepayment may attract some fee on the outstanding principal amount. Thus, before repaying, consider the rates and decide what stays to be the best option for you.
In the end, it’s a loan which you have to repay, take some time out to plan if you want a pre-approved loan or not. Do some online research, speak to a few relationship or bank managers and do the scrutiny of interest rate and your repayment ability. Always try and prepay the loan, if possible, and decrease the total interest payout. Wish you luck with your personal loan decision, make the most of it.