Should you opt for a low-interest pre-approved loan or a fresh loan?

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What is a pre-approved loan?

Pre-approved loan is a proposal made by a bank or financier to an existing account holder based on his or her payment history, salary, and credit report. Since the financier is aware of your finances, sanction is rapid, documents are fewer, and disbursal is rapid. Such loans are largely unsecured, i.e., no security is required.

How does it differ from a new loan?

A new loan requires you to make an application with all the paperwork, go through the eligibility tests, and wait for approval. Even though this takes your time, you are free to compare interest rates from different banks and drive a good bargain. Pre-approved loans, on the other hand, are offered by your existing bank, which may or may not provide the best interest rate in the market.

Considerations before making a decision

Start with the comparison of the interest rates. A pre-approved loan is perhaps slightly less expensive because, as a low-risk borrower, the bank already considers you. But a new loan from another bank might have a lower promotion rate.

Processing fees and any additional fees should also be taken into account. In certain instances, pre-approved loans do not incur any processing fees, a major saving for you.

The rate of disbursal is also an important consideration. If you want money urgently, a pre-approved loan is better since it is credited to your account within hours. A fresh loan will disburse within a few days.

Which is best for you?

If you need money in a hurry and the rate of interest offered is decent, then the pre-approved loan is the ideal choice. It is convenient, reduces paperwork, and gives instant access to cash. But if you have the luxury of time and want to shop around for more favourable rates, comparing quotes with multiple lenders will help you obtain a new loan at reduced fees.

Also check your repayment capacity. Pre-approved loans being easily available, there is a risk of over-borrowing. Always calculate the EMI and ensure it is affordable for you before you proceed. Proper comparison of both the options and considering your financial needs will allow you to choose the money-saving loan and the one suitable for your repayment capacity.

FAQs

Q1. Is a pre-approved loan always the lowest cost option?

No. While it may have lower interest due to your present relationship with the bank, there may be more attractive terms under new loans from other lenders.

Q2. Will a pre-approved loan hurt my credit score?

No, your credit score does not get affected if you take a pre-approved loan, as long as you pay the EMIs regularly.

Q3. Can you negotiate the interest rate on a pre-approved loan?

Yes, you may ask the lender to match lower market rates if you have a favourable credit history.