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How Pre-Approval Can Protect You from Dealer Financing Traps

Published: September 20, 2024

How Pre-Approval Can Protect You from Dealer Financing Traps

When buying a car, many people focus on the sticker price, but the financing process can have just as much impact on your total cost. What many car buyers don't realize is that dealers can profit from your auto loan in various ways, from interest rate markups to unnecessary add-ons. By securing pre-approval for your auto loan through USSFCU, you can shield yourself from these traps and confidently navigate the car-buying process. Here’s how pre-approval can help.

Interest Rate Markups

Dealers frequently work with third-party lenders to help you finance your car. While the lender may approve you for an interest rate, the dealer can mark up that rate before offering it to you. For example, a lender might approve you for a 4% rate, but the dealer might bump it up to 5%, pocketing the extra percentage as profit.

How to Avoid It: Get pre-approved through USSFCU before heading to the dealership. Pre-approval allows you to secure a fair interest rate in advance, so you know exactly what you qualify for and can avoid inflated rates.

Dealer Reserve

Another way dealers profit is through a dealer reserve, which is essentially a commission they earn from the lender for arranging your loan. The higher your interest rate, the bigger the reserve the dealer pockets. Unfortunately, many buyers don’t realize this is happening behind the scenes. 

How to Avoid It: With pre-approval from USSFCU, you can work directly with your lender and avoid hidden commissions or markups, ensuring that you’re getting the best possible deal.

Add-On Fees and Loan Packing

Dealers often sneak in extra products like extended warranties, gap insurance, or service packages into your loan agreement. These add-ons can significantly increase your monthly payment. This is known as loan packing, and it’s a tactic many buyers don’t spot until it’s too late.

How to Avoid It: By getting pre-approved, your loan amount is already determined, making it easier to spot any unnecessary extras the dealer tries to add. If you’re unsure about specific fees, USSFCU offers many of the same services, often at lower prices, allowing you to avoid costly dealer add-ons.

In-House Financing (Buy Here, Pay Here)

At Buy Here, Pay Here dealerships, the dealer acts as both the seller and the lender. They make money on both the car sale and the interest on your loan. This often results in significantly higher interest rates, especially for buyers with poor credit.

How to Avoid It: Instead of opting for in-house financing, work with USSFCU to secure a competitive loan with fair rates, regardless of your credit situation. We offer transparent, honest financing options to help you avoid these higher costs.

How Pre-Approval Helps You Avoid Auto Financing Scams

Pre-approval isn’t just about securing a good rate—it’s also a powerful tool for avoiding scams that can cost you thousands. Here are some common traps that pre-approval helps you dodge:

1. Yo-Yo Financing

In a yo-yo financing scam, dealers let you take the car home before the loan is finalized, only to call later claiming the financing didn’t go through. You’re then pressured to accept worse terms or return the car, which can be a huge headache.

How Pre-Approval Helps: With pre-approval, your loan terms are locked in before you even visit the dealership. You can rest easy knowing your financing is set and won't be changed later.

 2. Bait-and-Switch Tactics

Many dealers advertise low interest rates to attract buyers but then claim you don’t qualify for those rates when you arrive, offering higher terms instead.

How Pre-Approval Helps: When you’re pre-approved, you know the exact interest rate and loan terms you qualify for. If a dealer tries to change the terms, you can confidently decline and walk away.

3. Avoid Hidden Fees

Dealers may slip in hidden fees and add-ons without explaining them, inflating the cost of your loan. This is known as loan packing, and it can leave you paying more than you expected.

How Pre-Approval Helps: With pre-approval, your loan is already set, which makes it easier to spot and reject any unnecessary add-ons. You’ll be able to focus on the car, not confusing financing terms.

How to Get Pre-Approved with USSFCU

Getting pre-approved for an auto loan with USSFCU is simple. You can apply straight through my.ussfcu.org or call us 24/7 at 800.374.2758 and speak with one of our loan officers to review your credit and determine how much you qualify for. We’ll provide you with your loan amount, interest rate, and terms so you can head to the dealership with confidence.

Drive Smart: Auto Loan Advantages with USSFCU >

Final Thoughts

Pre-approval is one of the most effective ways to protect yourself from auto financing traps. It gives you the upper hand in negotiations, prevents dealers from marking up your loan, and ensures you’re getting the best deal possible. At USSFCU, we’re dedicated to helping you make smart financial choices. Start your car-buying journey today by getting pre-approved, and avoid costly financing mistakes.

Learn more about USSFCU's auto loan options

Article content is provided for information purposes only. All loans subject to credit approval. Rates and/or credit limits are based on creditworthiness, income and debts. Rates subject to change without notice. Not all applicants will qualify for the lowest rate. No private party sales, Carvana purchases, third-party broker or auction services are eligible.

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