A loan that a lender issues to a borrower before an auto is purchased. These loans are usually valid for a limited time only, such as 30 days from the loan approval date.
To give yourself a negotiating advantage, always get a pre-approved loan when you’re ready to go car shopping. Have a pre-approved loan check draft with you when you walk into a dealer, or when you go to test drive a used car that’s for sale by an individual owner.
Why? Having a pre-approved loan gives you negotiating power when you’re shopping for a car, whether you’re buying from a dealer or a private owner. Having a locked-in rate also protects you if interest rates rise before you close the car deal. The loan must be used within a set time, such as 30 days from the day the loan was approved.
If you already have a locked-in rate from another lender, having a pre-approved loan may help you get the dealer to knock down his rate to match. Dealers make approximately half of their money through financing for the autos they sell. Their interest rates are often higher than what you could get shopping for and getting a pre-approved loan on your own, depending on your credit rating. They can sell the loan back to a lending institution and receive a commission based on what you’re paying in interest and what the bank normally charges.
One way to get a pre-approved loan is to tap into your home equity to finance your auto purchase. The interest rate may be lower than that of other pre-approved loans, and the interest may be tax deductible.
If you’re considering accessing your home equity, make sure you weigh the pros and cons of doing so. The best loan option is always the one that best meets your individual needs.