The purchase of a long-term fixed asset largely depends upon the availability of credit. People who want to purchase assets such as cars or houses, usually rely on financing such as auto and home loans (auto and home loan financing). The applicant for such a scheme approaches the lender with an application stating the need for finance. It is important to understand that without a concrete reason, the lender would not consider the case. The lender then reviews the individual's credit rating, income, and runs a background check.
If the applicant qualifies, then the loan is approved, and the applicant, or rather the now borrower, is able to purchase the specified asset. After the asset is purchased, the borrower pledges the same asset as collateral, and the lien is transferred to the lender. Hence, the lender is secured from any losses in case of a default. A pre-approved home loan, however, works in a similar manner, but with one important difference.
How it Works
In this scheme, the borrower can approach the lender directly without a case/reason for a set amount of finance. To approve such a provision, the lender will perform a credit check of the borrower and analyze his credit report. Then, he will go through some factors, such as the borrower's background and identity check, income, projection of income, etc. Once this is done, the lender provides the following details:
- The amount of credit that can be availed by the borrower.
- The rate of interest that would be levied.
- Whether the loan would be secured or unsecured.
- The time period for repayment.
- The number of missed installments that would denote a default.
The would-be borrower then, can approach the seller with these details, as proof that he is getting financed with a certain credit limit for the purchase of the asset.
This process of pre-approval, in fact, proves to be very advantageous, as the borrower can easily look for a property in accordance to the details that have been already provided by the lender. Another advantage is that the borrower can look for a suitable down payment, or a second mortgage, before finalizing the real estate that he wishes to purchase. This mechanism is extremely helpful, especially for first-time property buyers.
Many property agents and dealers, in fact, recommend people to first get the pre-approval procedure done. The reason behind it is simple; one can easily plan out the repayment and check if it is feasible with his financial status, and avoid chaos. Once the bank provides the final estimate on the credit limit, details such as the rate interest and time period for which the repayment would last, are also conveyed in the quotation. If the monthly installment proves to be too burdensome, one can always work on his credit rating before applying again.
The advantage of such policies is that, one can forecast their repayment strategy even before they actually purchase the property. Also, the online application for this process is very easy to complete, and provides genuine financing details within a few hours time.