Pre Approved Auto Loans

What You Need To Know About Pre-Approved Auto Loans.

Pre-approved auto loans are promoted as a way to get the best deal at the dealership when purchasing a car. In theory, people who go into the buying process with pre-approved auto loans before they get to the dealership have a stronger bargaining position than those who do not. In my personal experience, people who have pre-approved auto loans are not helped that much in the bargaining process. Most dealers have a bottom line that they can go to, and that is as far as they will go whether the buyers have pre-approved auto loans or not. In today’s tough economic times buyers are likely to get a good deal whether they have pre-approved auto loans or not. It has is also my experience that most dealerships will try to get you to apply for a loan through their financial sources.

If your credit rating or FICO score is not in the "good" or "excellent" category a pre-approved auto loans, especially ones that you can get on-line on the internet, saves you the embarrassment of being rejected for a loan to your face or having the dealer tell you that they need more time to try and find financing for you. In my personal experience, Capital One Auto Finance (http://www.capitalone.com) has one of the quickest on-line response times for a pre-approved auto loans – AND is the most likely to accept your application and give you a loan if your FICO score is in the high poor or low weak values (600 or so). Once you have been approved, they will mail you a check that you take to the dealership and make out to the dealer for up to the pre-approved amount, under the conditions of the loan which are discussed later. With a pre-approved auto loans you know up front how much you can spend on a car and what the car payments will be.

In this regard you can go into the car buying process being an informed consumer, knowing price range of cars that you can consider. Beware though that most pre-approved auto loans will have restrictions as to the age of the car, the mileage on the car, the minimum value of the loan, and the maximum value of the loan. Many pre-approved auto loans will also require that you purchase the car from a dealership that is registered or pre-approved by the loan company such as a brand name dealership (Honda, Ford, Chevrolet, etc), a company such as CarMax or one of the national rental car agencies that sell their used rental cars. In general, a pre-approved auto loan cannot be used to purchase a car from an individual or one of the independent used car lots that you see on many city streets.

The interest rate on the pre-approved auto loan will also generally vary depending upon the year of the car. A new car will have the lowest interest rate and an older used car the highest. This variation in interest rates can vary can much as 4 – 5%. There is one major "gotcha" that one has to be aware of when using pre-approved auto loans, especially for a used car that does not have any dealer rebates associated with it. Most pre-approved auto loans have a provision that the loan is good for 105% or 110% of the NADA value of the car. NADA is an association that publishes appraisal values of automobiles. The difficulty arises in the following scenario.

You want to purchase a used car that the dealer will sell for the NADA value. HOWEVER, you also have to pay tax, title and license. In Texas the tax rate can be as high as 8.5%, plus the title and license fees. These extra costs may put the total cost of the car over the 105% of the NADA value of the car. In this case, what you thought was 100% financing with your pre-approved loans will leave you owing some cash at the time of the sale.