Getting a car loan doesn't have to be a nightmare, even with bad credit.

Pre Approved Auto Loans Give Shoppers the Advantage

last updated January 14, 2019

What does it mean to be pre approved for a car loan? As a buyer, you have a creditor who’s already worked out financing for a car that you’re planning to purchase. It’s specifically tailored to match your income and credit ratings. Nowadays, you’ll also find pre approved auto loans for bad credit.

Are you planning to apply for one? Let’s see how they work.

Pre Approved Auto Loans

1. How do pre approved car loans work?

This type of financing is different from a typical auto loan or buy here pay here dealership deals. You’ll notice that your bank or credit union does a soft pull on your credit score. Doing this enables them to assess your credit history without affecting your ratings.

Next, they assess your income and banking activity for the past 2-3 years. This enables them to figure out your financial stability and debt-to-income ratio. The credit department then uses this information to determine the right limit to lend you for a car purchase.

Just like typical auto financing, you’ll pay a down payment in order to receive the car. Your bank or credit union then pays the outstanding balance while you start making monthly payments. The interest rates and repayment periods are usually pre-determined.

Suggested read: How to buy a car in another state

2. Is it better to get preapproved for a car loan?

Let’s look at the pros of using this option to buy a vehicle.

1. Helps you to set realistic expectations

Your credit lender will tell you exactly how much financing you’ll get. Some put it at 80% of the car’s book value while others give you a spending cap. This is more reliable than walking into an auto finance lender’s office with crossed fingers.

Once you know your loan limit, it’s easier to narrow down the list of potential cars that match your budget. You’ll also decide whether to get a brand new car or wait to get it one year later when it’s more affordable.

2. Tailor-made for your financial situation

Ever heard of an underwater car loan? It’s whereby the credit or outstanding loan balance exceeds the value of a car. High interest rates usually push car buyers into paying upside down loans because the rate of depreciation exceeds the rate one gains equity.

Due to the careful analysis of your credit and financial history, banks already know how much you can afford in terms of monthly payments. So, the interest rates you get are manageable to ensure that depreciation doesn’t turn your loan upside down.

3. Plenty of creditors to pick

One big advantage about pre approved financing is that you can go to any bank or credit union that’s willing to help you. If you don’t like the terms offered by your bank, all you have to do is carry your credit report, pay stubs, and bank statements when visiting other lenders near you.

Doing this helps you to save money because you’ll end up choosing the credit lender offering affordable interest and friendly repayment periods. The less you spend on interest, the faster you pay up the loan and build your credit score.

4. Counter inhouse financing offers

In house financing is great, but it’s the few shrewd dealerships that make it appear like a scam. Some dealerships take advantage of customers especially those with bad credit because no bank or credit union wants to finance their car purchases. One ends up paying high-interest payments that make the car purchasing experience unpleasant.

When you already have pre approved financing, you’ll be in a better position to resist offers made by car dealerships. Banks usually offer this financing to customers with excellent credit ratings. So, it’s impossible for a car dealership to offer a more competitive interest rate.

See also: Do you need help on how to lower your car payment

5. Enhances your confidence

When one walks into a dealership hoping that the sales rep will look out for them, it ends up badly. If you had $15,000, the sales rep can convince you to buy a car worth $60,000. Then he or she might state a monthly payment that will make you feel comfortable, however, you get trapped in a long and expensive loan.

On the other hand, when you have $15,000 in your bank account plus a pre approved auto loan, you’ll end up with the car that matches your desire rather than settling for what your seller picks out. It’s easier to walk out of a bad loan arrangement when you already have financing elsewhere.

6. No hidden costs

Have you ever come across a friend or relative who complained of hidden costs at the end of their inhouse financing plan? Some car dealerships have a reputation of ripping off customers by imposing these fees during the final month of the repayment period. They do this because they know that you’re desperate to receive the car title.

When you’re dealing with a bank or credit union, every fee is clearly printed in the loan application form. You also get time to ask the credit officer as many questions as necessary, unlike dealerships that use subtle tactics to pressure you into signing without carefully reading the contents of your loan application.

7. Easy and fast

When you apply for a pre approved car loan and have all the documents at hand, you’ll receive it within 5-7 working days. Thanks to the internet, banks take little time to verify your identity and financial information. That’s why you can use a preapproved loan to get a new car right after a natural disaster or theft.

How long does the bank take to pay the dealership? After you make your down payment, the bank pays your outstanding balance within 30 days. That’s the same time expected for you to make your first monthly payment.

8. Simplifies car buying process

Let’s assume that you reside in South Carolina but you’ve traveled to Arizona for a two-week seminar. After a couple of days, you realize that your wife’s birthday is just around the corner. So, you plan to get her a new car but how can you buy it when you’re thousands of miles away from home?

As long as you have a pre approved car loan, you can buy a car online. Just pick the model and color you want and wire the down payment. The dealership will take care of the delivery while your bank clears your outstanding balance.

See: How to buy a car privately

9. Improves your auto credit history

An auto credit history is a report showing your payments for current and previous car loans. Does a car loan pre approval affect credit score? No, it doesn’t. Your bank or credit union does a soft inquiry that enables them to access your information without costing you points.

When a potential lender notices that you received pre approved auto loans in the past, they feel confident doing business with you. In fact, you qualifier for higher credit limits because you already have a track record.

Read: Buying a truck with a poor credit score

10. Suitable for Black Friday and Holidays

Let’s assume you’re planning to get a new car during the Christmas holiday. The dealerships near you have offers but you find the interest rates costly. So, you decide to visit other sellers to compare offers. However, by the time you get a good deal, the car you want has run out of stock.

When you have pre approved financing, you really don’t care what the inhouse financing interest rates are. All you have to do is wake early in the morning and head to the dealership during huge discounts like Black Friday. Once you pay the deposit, you’ll enjoy paying affordable monthly payments.

Now that we’ve looked at the benefits, what are the cons of using this method?

1. Pre approved car loan bad credit are really expensive

The rapidly rising demand for cars has made lenders adopt more friendly credit lending policies compared to a decade ago. Nowadays, you’ll find credit lenders that offer pre approved financing to buyers with credit scores as low as 580.

Are these deals good? Well, the buyer gets more freedom of choice compared to a typical bad credit loan. However, the total interest payments are almost thrice what a customer with an excellent credit score pays for the same amount. Why does this happen? Because creditors impose high interest rates.

2. No room to change decisions

When your bank notifies you that they approved your application, you have 30 days to buy a car. After this duration, you have to reapply from scratch. Sometimes you may visit several dealerships looking for a particular truck only to find it’s out of stock. So, you decide to settle for your plan B and make the down payment.

After a week, you spot the exact car you wanted where you got your current car? Can the bank allow you to return it and get your plan A? Unfortunately, they can’t allow you. That’s a huge limitation because one ends up paying for a car that they don’t like.

3. Four reasons why pre approved auto financing is better than buy here pay here deals

1. Affordable interest rates

Pre approved car loans have low interest rates because lenders usually target debtors with excellent credit scores. You can even get a bank charging as low as 4%. At this rate, you can minimize interest payments by choosing repayment periods lower than 48 months.

In house financing targets car buyers who cannot set foot in a bank or credit union due to terrible credit ratings. So, they take advantage by charging double-digit interest rates that can get as high as 16%. Let’s assume you have an excellent credit score that allows you to get a pre approved loan at 4%. You get financing worth $30,000 and the repayment period is 48 months. How much will you pay each month? $678.

A subprime buyer happens to apply for the same amount. However, your lender imposes a 16% interest and a 48-month repayment period. How much will the dealer expect from this buyer each month? $851.

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2. Gives you the freedom to visit several dealerships

Buy Here Pay Here deals are purely exclusive. This means that a dealership cannot give you money to buy a car at a different seller. A buyer has to pick their choice based on the vehicles available at the lot.

When you have a pre approved auto loan, you have the freedom to visit as many car dealerships as necessary. This gives you the freedom to compare prices and after-sales benefits offered near you. You get to pay for a car that you actually like because it has the features you wanted.

3. Builds your credit score

Banks and credit unions help you build your credit score whenever you borrow loans from them. When you buy a car using your pre approved financing, the lender registers your debt in credit reference bureaus. Each payment you make contributes points to your original credit rating when applying for the auto loan.

Some car dealerships usually have independently-established credit unions that enable them to offer buyers financing without involving banks. In this situation, your debt payment doesn’t contribute any points to your credit rating.  However, they might report late payments.

Suggested read: Are you planning a cash purchase for your next car?

4. Increases your auto loan limit

Do you remember what an auto credit history is?

Now that you know its importance, how does getting a pre approved auto loan make it better? Your car monthly payments appear in your credit report. If you always pay on time, potential lenders will conclude that you have great financial stability.

After the end of your loan, you’ll notice a major improvement in your credit score. A higher credit score comes with two benefits. First, you get lower interest rates for your next loan. Second, your credit limit rises. If you previously couldn’t spend more than $30,000, your credit limit might rise to $45,000.

Read: Trading in a car when you have a poor credit score

4. How to buy a car with a pre approved auto loan

1. Find a dealership with high-quality cars

A pre approved car loan gives you a chance to upgrade your everyday ride. As a buyer, you want a car that’s in excellent condition because you want to spend the least on maintenance. Plus, getting a good car also enables you to get a reasonable deal when doing a trade in.

Ask your friends for referrals and take time to visit each recommended dealership. Doing this enables you to confirm whether the inventory published online is true.

2. Negotiate for a better price

Smart debtors know that one way of reducing loan monthly payments is by reducing the principle. You actually get more value for money on the car you want by negotiating for a lower price. Doing this enables you to spend less credit and lower your monthly payments.

Using a car loan calculator

3. Pay a large down payment

The second way smart debtors reduce monthly payments is by paying huge down payments. You actually gain equity at a higher rate and this prevents your loan from turning upside down. By reducing your outstanding balance, you can choose short repayment periods and save money.

Are you ready to apply for one?

A pre approved auto loan allows you to upgrade and improve your credit score. When you compare it to in house financing, it’s clear that banks enable you to get value for money because you can walk in and out of any dealership. Plus, you get really affordable interest rates compared to alternative credit lenders.

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