Benefits of getting pre-approved for a car loan

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Before shopping for a car, take the time to get pre-approved for a car loan. In addition to helping you get the best interest rate possible, pre-approval gives you leverage at the dealership and peace of mind about your purchase.

It’s easy to get pre-approved for a car loan from credit unions, banks, or online lenders before you go to the dealership. Here’s why you should and how to get started.

Set a realistic budget

Getting pre-approved for an auto loan helps you set a realistic budget for your car purchase since you know how much you can borrow and at what interest rate.

Your purchase price should be lower than what you are actually approved for, as you will need to reserve around 10% of the loan amount for taxes and fees. You’ll also want to consider the down payment and trade-in amounts that offsets the purchase price.

With all this information, use a auto loan calculator to estimate your monthly payment. You can then make sure that your car payment will fit your budget, and if it doesn’t, you can look for a cheaper car. And don’t forget, your total car expenses – including things like insurance, gasoline and maintenance – will be more than just the payment of your loan.

Get protection against dealer surcharges

Dealer financing is convenient, but if you haven’t shopped around, a dealership finance manager might try to take advantage of it and raise your interest rate. This could mean you’re paying 1 or 2 percentage points more than you should, which can add up to hundreds of dollars over the life of your loan.

By getting pre-approved, you’ll know you’ve gotten the best interest rate you can qualify for and be able to judge if the dealership is offering you a good deal.

Strengthen your negotiating position

With your blank check or lender approved certificate in hand, you are transformed into a “cash buyer” in the parking lot and you are in a much stronger negotiating position.

The smiling car salesman asks, “So what monthly payment are you looking for?” “

By negotiating the monthly payment, the CFO can inflate, or “wrap”, the payment with charges or fees that often bear little relation to the price of the car.

But if you get pre-approved financing, you can avoid this sales tactic.

You can smile back and say, “I’m a cash buyer. Let’s just talk about the price of the car.

If you have a trade, look for offers online for good value your old car will also put you in a stronger position.

Get an even better rate and avoid upselling

While you are negotiating and closing the deal, when signing papers at the finance and insurance office, you can use your pre-approval as an easy way to sidestep additions and extended warranty offers you don’t want.

Say, “I’m pre-approved for that amount and I’m not going to go over it. “

Or you can see if the dealer will beat your rate. Often, dealers have access to cheaper financing through “captive lenders”. These are banks created by car companies just to provide auto loans, and they may offer lower rates than other banks.

It’s worth filling out a dealership loan application to see special offers and incentives you may be eligible for, especially if you have good credit.

Should you be prequalified instead of being pre-approved?

Getting pre-approved for a car loan isn’t the same as being pre-qualified, it’s a little more serious. When you’re ready to buy, “the cash-in-hand, or pre-approval, offer is what can help you at a dealership,” says Delvin Davis, senior researcher at the Center for Responsible Lending.

If you have no idea what your credit rating is or what kind of loan you might be able to get, prequalifying is a low risk way to find out. It only requires “soft” credit, so you can get a rough estimate of what kind of rate you could get without damaging your score. But rates aren’t guaranteed – they can’t be as accurate as the limited information you provide for prequalification, so your final rate could be higher.

In general, wait until you get pre-approved until you decide to buy a car and know your credit score, as an application will impact your credit. While neither guarantee financing, both can be good indications of your ability to secure financing and help you determine how much car you can afford.

Shopping auto loans: pre-approval vs pre-qualification

Pre-approval means that a lender has looked at your credit report (not just the score) and other information to determine the loan amount and the rate you are likely to receive.

  • You will probably get the offered rate (your car must also meet the lender’s criteria).

  • Makes you a “cash buyer” at the dealership.

Prequalification means that you are likely to receive a loan at a certain rate (or within a wide range) based on limited personal and financial information. This is not an offer to fund you.

Prequalification Fast Facts:

  • The estimated rate may change based on a complete credit check.

  • Often has a wide range of interest rates you may be eligible for, but does not guarantee any.

How to get pre-approved for a car loan

You can apply to get pre-approved for a car loan online, over the phone or in person at a bank or credit union. Since you already have a relationship with your current bank, it’s a good idea to apply there.

Try to get pre-approval from two or three lenders altogether so that you can choose the best interest rate and apply for them all within 14 days. Even though pre-approval requires a firm credit application, if multiple lenders request your report within a short period of time, they count as one. It is a good idea to recheck your reports afterwards to make sure there are no errors.

After that, you can sit back and watch the deals arrive until it’s time to head to the dealership.


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