Purpose of Pre-Approval

[difringe]

Was thinking about applying for some cards and obviously there are a bunch of lenders who offer pre-approval/pre-qualification, which made me wonder...what's the purpose of pre-approval/pre-qualification for lenders? If it serves a distinct purpose and is valuable, why are there lenders who don't offer it? If it doesn't assist the lenders, then why do some offer it?

Just thinking about it quickly, I feel like it'd be better for lenders to offer pre-approvals, if they're really worried about the ability of borrowers to repay them...I imagine it would also save them the time/resources of having to process applications for borrowers who clearly don't qualify, but don't know that they don't.  Was just curious if anyone here had any insight into this.

[pizzadude]

It's really about marketing to targeted customers.  In some cases companies will spend the money upfront to direct mail / email consumers based on whatever criteria they have in place.  Others allow anyone to input their own info online for pre-approval purposes. 

[Brian_Earl_Spilner]

I'm sure there's a cost even if it's a SP. 

[FireMedic1]

We know there are some companies that are pretty on point with pre-quals. The majority are almost like lure you in getting your hopes up with all the fancy incentives and get you all excited then give you a yes basically only to turn you down. I'd like to see what the percentage is on how many are successful compared to sorry no soup for you.

[difringe]

That's my point, idk what credit companies gain from allowing any and everyone to apply for their products, and rejecting them because they aren't qualified. I guess you can say 'we've had 1,000,000 applicants for our product, so we know it's in high demand,' which i guess is good, but if you were only gonna approve 1,000 of those applicants, not sure what you gain other than knowing that you have a desired product?

[difringe]

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@pizzadude wrote:

It's really about marketing to targeted customers.  In some cases companies will spend the money upfront to direct mail / email consumers based on whatever criteria they have in place.  Others allow anyone to input their own info online for pre-approval purposes. 

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I mean, I'd get this, if those companies only did the direct mail/e-mail, but once you allow anyone to input their info, you lose that sort of specialized targeting, no?  I'd expect companies to do the former, to increase the odds of getting prospective customers who qualify based on their criteria, and thus are more likely to keep up with their obligations.

[Anonymous]

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@difringe wrote:

That's my point, idk what credit companies gain from allowing any and everyone to apply for their products, and rejecting them because they aren't qualified. I guess you can say 'we've had 1,000,000 applicants for our product, so we know it's in high demand,' which i guess is good, but if you were only gonna approve 1,000 of those applicants, not sure what you gain other than knowing that you have a desired product?

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I'm sure there is some complex cost benefit analysis that is done by the companies to determine if the pre-approval/pre-qualification apps are worth offering, for many it looks like it is. Citi is no longer offering an online prequal form, so maybe they have determined it isn't benefitting them?

My best guess is that FIs hope by offering prequal they can acquire customers that would normally work with a competitor.

Also it may be a method for them to acquire customers that they would lose if they applied for a premium product that they did not qualify for. For example, a person building credit hears great things about Chase and they decide they want a Chase Sapphire Reserve. Instead of apping directly for that card and getting denied they do a prequal and it comes up with an offer for a Freedom card, they now apply for that and are happy and stay with the Chase portfolio for the rest of their life and Chase hopes they will open bank accounts, car loans, mortgages, investments, etc. If they didn't offer a prequal and that person app'd for a Sapphire Reserve and were denied then they may write off Chase for an extended period of time, possibly even their entire life.

[credit_is_crack]

I think you'll find a lot of speculation on this topic but always keep in mind that a bank is a business. There are both pros and cons to having/not having it.

For banks that offer it, it gives the customer who might be on the fence a little extra push to apply. For banks that don't offer it, they'll let you apply blindly and if you don't qualify they have more liberty to offer an applicable counter-offer and still gain your business because they had a full hard-pull. They know exactly what you're working with. 

They are in the business of making money and although they will deliberately let customers get rejected, it doesn't mean they are not being incentivized by the processor to drive more traffic. It's almost like the "swipe fee" at the bank level. 

"Get X amount of prospects to prequalify and we can quantify your desirability, which you can use as articulated leverage when you sell everything off". Banks chose to/not to offer them for various reasons but it's always the same goal, to make more money. We're just the pieces they move around to "look busy" lol

The banks position is "well it's youre credit, you should know if you'd be able to qualify for something. It's not my fault you miscalculated that." It's a junk response, but we're there any lies?

You know if you're getting that new luxury car that cost 3x your annual income before ever stepping foot on that lot. Cars are not cards, but their stance on the principle is the same.."you should know"

Prequals are consumer friendly, but certainly not a requirement to stay in business. 

thats just my two cents..

[OmarGB9]

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@Anonymous wrote:

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@difringe wrote:

That's my point, idk what credit companies gain from allowing any and everyone to apply for their products, and rejecting them because they aren't qualified. I guess you can say 'we've had 1,000,000 applicants for our product, so we know it's in high demand,' which i guess is good, but if you were only gonna approve 1,000 of those applicants, not sure what you gain other than knowing that you have a desired product?

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I'm sure there is some complex cost benefit analysis that is done by the companies to determine if the pre-approval/pre-qualification apps are worth offering, for many it looks like it is. Citi is no longer offering an online prequal form, so maybe they have determined it isn't benefitting them?

My best guess is that FIs hope by offering prequal they can acquire customers that would normally work with a competitor.

Also it may be a method for them to acquire customers that they would lose if they applied for a premium product that they did not qualify for. For example, a person building credit hears great things about Chase and they decide they want a Chase Sapphire Reserve. Instead of apping directly for that card and getting denied they do a prequal and it comes up with an offer for a Freedom card, they now apply for that and are happy and stay with the Chase portfolio for the rest of their life and Chase hopes they will open bank accounts, car loans, mortgages, investments, etc. If they didn't offer a prequal and that person app'd for a Sapphire Reserve and were denied then they may write off Chase for an extended period of time, possibly even their entire life.

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I think this is a good analysis. Most likely lenders want to lure new customers in and then if they're approved, they hopefully will expand their membership with that specific FI to include checking/savings accounts, loans, CDs, etc. as mentioned above.