Pre-Approved Car Loans: A Blessing for Bad Credit

Pre-approved car loan lenders essentially guaranty they will fund your loan regardless of your application. Of course, there is a huge twist: the loans are usually very expensive due to high interest rates. For this reason, they are not the best option for good credit borrowers who can get a bank or dealer loan at a lower rate. However, high risk borrowers may not have these same options. For those people whose credit is not good enough for most loans, pre-approved loans are a blessing.

Bad Credit Not a Problem

The main reason these loans work for bad credit borrowers is because credit is not considered as important as a person's ability to make loan payments. This means, as long as a borrower can show he or she has a stable income, the loan will be extended based on that factor. Instead of being judged on how you have performed on the past, you are judged on how you may perform in the future. This is especially beneficial to people who are coming out of a bankruptcy or credit consolidation process. It helps those borrowers get back on their feet and begin the process of rebuilding credit.

Typically Small Loan Amounts

The high interest rates are partially negated by the fact these loans are usually for small amounts to be paid off in a short period of time. When loan amounts are high and loans terms are extended over years, the cost of financing at a high interest rate begins to creep up. Loans paid off quickly, though, will compound less times. This means the actual annual percentage yield, or the total cost of financing, will be lower. Bad credit borrowers are not often looking for pricey luxury vehicles, so the small loan amounts usually suffice.

Easy and Fast Application Process

Most pre-approved loans are either given directly at a car lot or through the Internet. The applications can be filled out within minutes, and a background check and income verification are typically the only requirements to get the loan. These loans do not often involve any collateral, and they rarely require cosigners. All of these issues mean the loan is funded nearly immediately. A borrower simply has to wait for the lender to ensure the application is not fraudulent prior to handing over the funds to purchase the vehicle. Bad credit borrowers who need a car fast will benefit from the decreased wait time.

Low Insurance Standards

Your lender typically sets some level of car insurance standards you must maintain. These standards ensure you do not under insure the car, leaving the lender with nothing if you default on the loan and total the vehicle. Banks and traditional car finance companies typically have the highest standards for insurance requirements. This can end up costing a driver hundreds of more dollars each month in order to own the vehicle. With lower standards required from pre-approved car loan lenders, the premiums charged on a monthly and yearly basis also reduce the cost of ownership for a bad credit borrower.