Pre-approved car loans are a great way to save money when buying a car. They are simply loans already approved by the potential lender. With an understanding of how much you can spend, you can shop around for the best interest rate and loan term.
A pre-approved loan also puts you in the driver’s seat when it comes to negotiating the outside price of the car. But before applying for a pre-approval, be aware of the potential pitfalls of pre-approved loans, such as not being guaranteed approval.
What is a pre-approved car loan?
Pre-approved auto loans are loans that lenders have already conditionally approved. This means that the lender has already decided to grant you the loan. This allows you to walk into the dealership just like a cash buyer would.
The pre-approved car loan details the interest rate, the amount of the car loan and the loan terms that the lender is willing to extend to you. This can also be used to negotiate if you also want to arrange indirect financing through the dealer.
Benefits of a pre-approved car loan
A pre-approved car loan offers you several advantages as a borrower.
You can compare car loan interest rates
The pre-approval process is streamlined and is usually processed within 30 minutes. As a result, you can shop around for the best loan rate and compare it with other lenders. Please ensure that all complete applications are made within two weeks so that they do not count as multiple applications on your credit report.
You may get a better interest rate
Pre-approval gives lenders an idea of what other institutions are willing to lend to you. If your credit is strong enough, some lenders may offer you a better interest rate to entice you to opt for them.
You have control over your monthly payments
If you’re pre-approved, that means you’re already set on the amount you’re borrowing, your interest rate, and loan term. That means your monthly payment amount is already sorted.
You have the bargaining power of a cash buyer
Because you are not dependent on the dealer for financing, you can focus on negotiating the outside price rather than the monthly payment. Remember not to show your hand too early when it comes to how much you are willing to pay.
Disadvantages of a pre-approved car loan
Pre-approved car loans have potential pitfalls. Here’s what to look out for.
- Not guaranteed. A pre-approval of a car loan does not guarantee approval. As you go through the pre-approval process, you may be required to provide additional information and supporting documents before it is completed. And if your credit takes a significant hit between when you’re pre-approved and when you’re about to finalize the loan, you may be out of luck.
- Bad credit can disqualify you. If you have bad credit, you may not qualify for pre-approval. It’s still worth looking around before going to the dealer, but it may be more difficult to find a lender willing to pre-approve a loan.
- Matching pairs. A pre-approval for a car loan usually applies to a specific dealer or set of dealers, meaning you probably won’t be able to buy from a private seller.
- No financing deals for manufacturers. If you have excellent credit and choose to go with external financing, you will not be able to take advantage of a 0 percent financing offer if it is available. However, it is not because you have been pre-approved that you have to borrow the money.
How to get pre-approved for a car loan
There are a few main steps to follow to get pre-approved for a car loan.
- Determine your budget. The first step is to figure out how much you are willing to spend on a car. Look at your budget, including your monthly income, expenses and other bills.
- Gather your supporting documents. Keep your pay slip, employer information and all personal information on hand for when you apply.
- Shop. Find at least three lenders that offer the amount and term you are looking for. Don’t settle for the first lender you find and check customer reviews to see if there are any red flags.
- Request permission in advance. Once you’re ready to apply, you can visit your lenders’ websites or go in person to get pre-approved. You will probably have to fill out some forms. Be prepared to spend at least 15 minutes on each application.
- Go to your local dealer. You can then shop around for a car so you know exactly how much you can afford.
it comes down to
If you are looking for a car, applying for a pre-approved loan can save you money and stress. While it cannot guarantee that you will get the exact vehicle you want, it gives you an edge in the competitive car buying process by allowing you to walk into the dealership and know exactly how much you can afford.