4 Ways Pre-Approval Can Simplify the Car Buying Process

Posted on 14 September 2018 by Tony Santos

You may get flyers in the mail all the time with stamped lettering across the front stating, “You’re Preapproved!” And, like most people, you may toss those right into the trash pile, never bothering to learn for what you’re preapproved or even for how much. Yet, if you’re in the market for a new vehicle, maybe you should take the time to open an envelope or two and see if any of the preapproval offers are for vehicle loans.

While it is true that most companies that offer preapproval for credit cards charge exorbitant interest rates and stricter-than-strict terms, if you receive a car-loan prequalification offer from a reputable company such as, say, Capital One, it couldn’t hurt to look into it. In fact, if you hope to enjoy a simple car loan process, it may be in your best interest to apply for prequalification. Below are four good reasons why.

 

Preapproval Helps You Set a Realistic Budget

Most preapproval offers are pretty spot-on with how much you can afford, as they calculate how much car and in interest you can afford based on your income, existing expenses, etc. Though you should never go car shopping without a budget in mind, preapprovals make setting a budget so much easier, as they give you a hard number to start with before you’re faced with shiny new vehicles and an overzealous dealer.

Keep in mind that your purchase price should really be about 10 percent less than what you’re preapproved for, as most calculators do not take into account sales taxes and fees. Also, consider your down payment. The more money you put down, the more you can afford.

 

Preapprovals Help Strengthen Your Position

Prequalification calculators take into account your credit history, score, income, and more to come up with a realistic purchase price, terms, and rates. This puts you in a position of strength when you go to the dealership.

Without that preapproval letter, the dealer will most certainly have all the power. Because you don’t know how much you can really afford, the dealer may be able to convince you that you purchase buy a car that is well outside of your budget, or that your “low credit score” warrants high interest rates. The dealer may also even attempt to pack the payment with charges or fees that are often unrelated to the vehicle at all. When you walk in armed with a preapproval letter, however, you can avoid these hassles altogether and get right down to business.

 

Preapprovals Protect You From Dealer Markups

Dealers love buyers who utilize their financing, as it means that they get a share of the profits. Dealers make their commission through what is called a finance reserve, which is typically an extra percentage added to the interest rate – usually one to three percent. For instance, say you get approved for a vehicle at 4.5 percent interest. The dealer keeps this from you and charges you instead 7.5 percent interest. You assume this is the best rate you can get and take it, not knowing that you just cost yourself an additional $756 to $1,512 or more over the course of your loan. By getting preapproved before you head to the dealership, you can know exactly what types of rates to expect, and therefore, walk away from ones that you know are marked up.

 

Preapprovals Help You Negotiate for an Even Better Deal

You can use your pre-approval to your advantage all the way through to the end of the deal. Right before you’re about to sign the papers, the dealer will try to convince you that you need a bunch of costly add-ons. Some such add-ons include a warranty, seat warmers, cleaning services, etc. To deflect these add-ons, say something like, “I’m preapproved for this amount and I’m not going over it.” If you remain firm, the dealer will usually desist. If you’re lucky, however, the dealer may throw in the add-on “for free.” Either way, thanks to your prequalification letter, you avoiding paying any more for features you don’t actually need.

Many people avoid preapprovals for fear that they’ll end up costing them more in the long run than if they had obtained a loan the traditional way. When it comes to financing a vehicle, this is far from the case. Preapprovals can help you set and maintain a realistic budget and strengthen your negotiation position.

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