Pre Approved Car Loan Question?

Thursday, March 12th, 2009 at 21:16

Melanie asked:

Hey Everyone thanks for taking the time to help me out with my question.

I wanted to know if when you are looking for a potentially new or used car, and show the dealer the pre-approved auto loan letter does that necessarily increase your bargaining power? Whats your opinion on it? How does it help or hurt you?

Additional Details
This pre-approved auto loan offer is from my credit union that I pharmacy online actually bank with, and they have handled my previous car that I now own and numerous personal loans on my behalf.

Reply:

In terms of negotiating the actual sale price of the vehicle it shouldn't make too much difference one way or another. If your
pre-approval letter is in fact a real advance approval notification from a financial institution you have done previous good business with (as apposed to some sort of mass mailed come on), it will tell the salesperson (and sales manager) that you are in fact qualified to finance a vehicle. But any dealership that is worth doing business with is going to operate on the assumption that ANY potential customer can in fact conventionally finance a vehicle, at least until they acquire specific information to the contrary. So in this regard you do not actually gain much.

Where your pre-approval may be beneficial is getting the best possible deal offered to you by the dealers finance department.

A dealership finance department is one of the businesses primary profit centers. Not only in terms of the insurance or warranty products they sell but also in the form of "finance reserve", which is an incentive paid to the dealership for arranging the loan from the finance source.

In other words all dealerships make money by arranging financing for you "in house". If you use your pre-approved outside source of financing they make nothing. So in order to keep your financing business "in-house" they are going to do everything they can to offer you a better deal than your pre-approved offer represents.

My advice is to know the exact interest rate for the specific term of financing you are interested in and use it as leverage with the dealerships finance department. Be aware that rates often vary with the amount being financed and / or the length of the finance contract, so you need to know all of the details regarding your pre-approved offer.

Many, many car buyers do there homework and aggressively negotiate the absolute best deal on the price of the vehicle they are purchasing, only to through away hundreds or even thousands of dollars by paying a percentage point or two higher interest. Your best deal on a vehicle should not be measured in terms of initial purchase price but in terms of the total you pay back.

Hope this helps,

Finance your car here onsite if you need help buying one of these beauties :)