Car loan preapproval puts you in a stronger negotiating position and helps you get the best interest rate possible. A preapproved car loan can help you prepare before you start car shopping with answers to these and other questions you might have.
How much can I afford to spend on a car? Preapproved car loans show you a rate, payment estimates and a maximum loan amount ahead of time, so you can set a budget before car shopping.
How can I get the best auto loan possible? Auto loan preapproval enables you to head to a dealership knowing how much you can borrow and at what rate. It’s an incentive for a dealer to beat or match the rate and terms.
Will I be approved for an auto loan? If you have any doubts about being approved for a car loan, preapproval can help you identify and address any obstacles ahead of time. Many auto lenders especially banks and credit unions offer preapproved auto loans. It usually doesn’t take long to apply for preapproval before you head to the dealership. Here’s why you should get preapproved and how to get started.
Why You should get Pre Approved for an Auto Loan
Getting preapproved lets you know how much you can borrow and at what interest rate, so you can set a realistic budget for your car purchase. That provides greater peace of mind when you select a car and commit to the expense. When you get an auto loan preapproval, you aren’t committed to spending the full preapproved loan amount. Also, when you know the amount you’re preapproved for, that doesn’t mean you can afford to buy any car with a listing price up to that number. You’ll need to factor in taxes and fees, which can be estimated by adding 10%. Any down payment and trade-in amounts will help offset the price. With all of this information, use an auto loan calculator to estimate your monthly payment. If the payment you calculate doesn’t fit into your budget, you might need to look for a less expensive car. And don’t forget, your total car expenses including insurance, gas and maintenance will be more than just your loan payment.
Avoid Dealer Financing Markups
Dealer financing is convenient, but if you haven’t shopped around, a dealership finance manager might take advantage of that by marking up your interest rate. Dealers have a number of lenders they work with at predetermined interest rates for borrowers with different credit scores. Lenders often have a pre-arranged agreement with dealers that they can add to your rate as much as 1 or 2 percentage points. That can add up to hundreds of dollars in interest over the life of your loan. Having an auto loan preapproval can help you judge whether the dealer is offering you a fair rate and whether you could qualify for a lower rate elsewhere. Even if you bring preapproved auto loan offers to the dealership, you’ll still want to fill out a credit application at the dealership to see if it can beat your preapproved rate. Often, dealers have access to financing through captive lenders the auto financing arm for car manufacturers which can offer lower rates than other lenders.
Strengthen Your Negotiating Position
With a preapproved car loan, you’re transformed into a cash buyer at the car lot, putting you in a stronger negotiating position. When you bring a maximum monthly car payment to the table, you can avoid a common car dealer practice of focusing only on the desired payment amount and extending a loan term to get there (which costs you more in total interest). Instead, you can tell the dealer you want to focus on the vehicle’s out-the-door price. And if you have a car to trade, knowing the value of your trade-in will put you in a stronger position at the dealership, too.
Auto Loan Pre Approval vs Pre-Qualification
The terms auto loan preapproval and pre-qualification are often used interchangeably, but they aren’t the same. Pre-qualification is less of a commitment from a lender. Lenders use a soft credit inquiry to provide rate estimates you might qualify for, but your final rate could be higher. Auto loan preapproval is a step up from pre-qualification. Lenders use a hard credit inquiry, which can slightly lower your credit score, but the preapproved loan rate and offer is less likely to change. Because of the impact to your credit score, it’s best to not seek preapproval until you’re serious about buying a car.
