You are not alone.
Like you, even I and millions of others are bombarded with unsolicited SMSs, emails and flashy pictures on net banking websites congratulating you on being among the chosen few who are just one step away from securing a pre-approved loan.
And at times, the offers being shown are indeed attractive. I love to travel and when I come across images of snow-capped mountains with a subtle message that I can go there without bothering about the costs using some pre-approved personal loans, then it’s hard to resist.
This may seem like playing on customer’s greed or whatever or you may call it smart & aggressive marketing. But nevertheless, pre-approved loans do work in a lot of cases and people end up taking them
What is a pre-approved personal loan?
A pre-approved personal loan is a simple, unsecured, personal loan that is offered to certain individuals or customers. It is not much different from normal personal loans in nature except that in this case, it’s the bank itself reaching out to lend.
So why are the banks being so benevolent?
They know how to do their business and many of us don’t realize that. If you are being offered a pre-approved personal loan, then it means that your creditworthiness has already been assessed favourably by the bank.
Lending is all about establishing the borrower’s creditworthiness reliably. Right?
Banks generally offer such pre-approved loans to their existing customers as they have reliable information about customer’s transaction history, their income, bank balance trends, etc. Hence by using smart data analytics, they can form a reasonably accurate picture/profile of what your cash flows are and how and where you mostly spend your money.
In addition, banks have access to customer’s credit scores which is another way of establishing the expected behaviour in case the customer is lent money and he/she is to service the loan.
The role of big data and reliable data analytics is very important in these pre-approved personal loans. A combination of better risk assessment and ability to analyse customer behaviour leads to more effective targeting of these pre-approved loan products and also of credit cards.
Over the last few years, the banks have improved their analytics capabilities manifold and are in a much better position to analyze consumer behaviour using their own databases. In addition, the data coming from credit information bureaus have also improved significantly. This, in turn, increases their ability to assess the risk in retail personal loans for all types of customers.
I have some experience with the analytics field in the financial sector and I can safely say that these days, we generate tons of data about our financial behaviour. We keep leaving digital footprints here and there unknowingly. So gradually over the years, financial institutions are becoming data-rich. This allows them to leverage the customer’s financial behavioural patterns. This aspect, when combined with their credit behaviour data (loan repayment, etc.), helps in better understanding of customer’s needs for credit and loans.
Apart from all this, the ease of taking loans has also increased. So now, no one abhors loans like they used to avoid it like diseases in previous decades. And the availability of credit has also improved rapidly in the past few years in India and around the world.
Ease of taking multiple personal loans (or any other loans) and converting them into small monthly EMIs are also driving the consumption of retail debt like personal loans. In fact, we are talking about pre-approved loans and things have even gone further. Taking unsecured personal loans for customers is now just a tap away on their banking apps! This is dramatically different from what used to happen in the past. Just a few years ago, taking a personal loan was a weeks-long exercise!
So what should you do?
The rules of the wise money game are still the same.
You don’t borrow unless you really need it. Plain and simple.
No doubt easier availability of credit is useful for those in need. But its best to avoid taking unnecessary loans or use credit cards you don’t need.
Because if you don’t, you will end up trapped in the debt cycle and will never get a serious shot at loan free life! And if you are continuously stuck in loan repayment phase of life, you will constantly be thinking about things like paying off loan Vs investing.
If you end up borrowing just because you are offered unsolicited pre-approved personal loans, then that’s wrong. Each rupee you borrow carries interest and has to be paid back.
I know being young, you may want to take a foreign vacation as there is a pre-approved personal loan offer available at a click-of-a-button. I love to travel. And I know this can be exciting. But borrowing unnecessarily for non-critical discretionary expenses isn’t the best use of your money. You should always deal with such expenses in a planned manner and save for them using goal-based investing.
If you are not disciplined in handling your finances, it is best to avoid pre-approved loans. Avoid these loans unless absolutely necessary. As mentioned before, do not take a loan just because you have been offered one. Borrow only if there is no other way out and after assessing your repayment capability.