How To Get Preapproved For A Car Loan
Hanna Kielar6-Minute Read
February 07, 2022
Financing a car can be a hassle, and it’s the part of the buying process most people dread. If you know how to get a preapproved car loan, you can shop more confidently and save some money. When you walk into the dealership with several loan offers on the table already, you won’t need to worry about whether you’ll be approved or if you can afford the vehicle you want. This guide reviews why getting preapproved is a good idea, how to get preapproved for a car loan, and how you can find the best interest rates.
Table Of Contents
What Does Preapproved Auto Financing Mean?
Car loan preapproval is a process that lets you secure loan offers before buying a vehicle. It’s slightly different from car loan prequalification because you need to provide more information to receive a set interest rate and term. Prequalifying for several loans is a good idea because it lets you see if you can get a better rate from someone else and only requires a soft inquiry on your credit, which will not impact your credit score. Getting preapproved requires a hard inquiry and will impact your credit score in the short term, so only do this when you’re ready to make your purchase. You can lessen the impact on your credit by applying for preapproval (and therefore making multiple hard inquiries) within 14 – 45 days of each other; depending on the credit scoring model used, companies may treat inquiries made within this window as one. Be sure to understand the inquiry window before starting your preapproval application.
After you receive your preapproval offer, you effectively have more leverage to use during negotiation to ensure you’re getting the best deal on the products you actually need.
Reasons To Get Preapproved For A Car Loan
Auto loan preapprovals make it easier to determine what kind of car to get because they can help you set your budget. You should see if you can get qualified for a loan before taking your first test drive because your loan offer will influence what you look for and where you shop. That way you are realistic about your price range and don’t fall in love with something you may not be able to afford. Getting preapproved allows you to do the following:
Prepare A Budget
Because your preapproval offer is based on your credit score and income, it helps you set a price range when you shop. It’s hard to know what your monthly payment will be based on the purchase price of each vehicle. A preapproval lets you set a budget before you go shopping.
Remember to consider additional costs of car ownership when budgeting, as you need to pay for gas, car insurance, maintenance, taxes and any fees. Estimating these costs in advance helps you determine a possible monthly payment or if you need to put more money down on the car to make it affordable.
Improve Negotiating Leverage
If you’re already approved for a loan, dealerships will take you a bit more seriously. They know that you intend to complete a purchase and that you’re creditworthy. You also may be able to explore financing through the dealership to see if they offer you a better interest rate than the offers you already have on the table.
When you’re preapproved, auto financing departments may give you a more straightforward offer without extended warranties and other add-ons. It’s still important to review each offer carefully to make sure you understand what you’re signing.
Set Yourself Up For Success
If you visit a dealership and buy a car without any prior preparation, you may feel buyer’s remorse when making your first monthly payment. You may question whether you could have gotten a better deal. This isn’t a liberating feeling.
Getting preapproved for a loan puts you in control of the process at the dealership. You can walk away knowing that you got the best deal, bought a car that you can afford and didn’t pay for anything extra. This gives you more automotive and financial freedom than if you were to go car shopping before securing your loan.
Best Ways To Get A Car Loan
Most people aren’t aware that they can complete the loan process from the comfort of their homes. Those who look for car loan preapprovals online aren’t subject to the pressure tactics used by salespeople trying to meet quotas. To get the best deal possible, you should do the following when searching for the right auto loan.
Check Your Credit
Credit scoring models are a bit different in the auto segment compared to other types of lending. Before you check if you qualify for a car finance loan, it’s important to know what the auto lenders will see on your credit reports. When you check your score, look for negative marks such as late payments and collections accounts. If these are inaccurate, you’re able to dispute them and get them removed before applying for a loan. If you can’t dispute them, it is still possible to buy a car with bad credit, though it may be worth working to improve your credit before applying.
Your credit check will analyze your credit utilization, so it helps if you pay off your credit cards in full. Lowering your total utilization helps lenders see you as more likely to make your payments on time. This can lower your interest rate or increase the amount of money you can borrow.
Compare Lenders And Rates
There are numerous places you can obtain financing from, so make sure that you check with online lenders, credit unions or your personal bank to see if you can get offers. Read the fine print when reviewing your approvals and consider that the best monthly payment or interest rate doesn’t always indicate the best deal.
For example, your loan terms could be for a year or two longer than other offers with slightly higher monthly payments or auto loan rates. Loans with shorter terms mean you’ll pay a little more each month but save thousands of dollars by paying the loan off a year or two earlier. The best choice is one that balances what you can afford each month while still reducing the overall cost.
When you’re applying for preapprovals, make sure that all the inquiries hit your credit within a two-week period. This will show on your credit report as a single hard inquiry and won’t hurt your score as much. If you’re worried about the hit to your credit, keep in mind that your score will quickly improve as you make your regular loan payments.
Apply For A Preapproved Loan
Before submitting a loan application, have your ID, Social Security number, income and job status ready because you’ll need to provide this information before obtaining approval. Apply with several lenders and try to get at least two to three approvals before you start car shopping.
You will receive multiple inquiries on your credit during this process, so it’s important to check your credit score after you’ve completed your purchase. This is to make sure that your score wasn’t unfairly reduced by multiple inquiries and to see that nothing else suspicious has appeared on your report.
Start Car Shopping
Online car buying lets you filter your options based on price and helps you discover deals that you wouldn’t find if you shopped locally. When you’re preapproved for a loan, you’ll receive confirmation of the approval and how long it’s good for. With most lenders, that’s 30 – 60 days. It’s important to understand that you’re not required to use a preapproval, which is why it’s a good idea to get several of them in advance. If you don’t use the preapproval in time, it will simply expire.
Depending on the terms of your preapproval, you may need to provide additional information, such as proof of income, residence and car insurance. Once you have all your information ready and find the car you want, you can complete the loan.
The Bottom Line: Auto Loan Preapprovals Simplify Your Vehicle Purchase
Getting preapproved for an auto loan takes a lot of guesswork out of car shopping. You don’t need to wait around at a dealership to see what your monthly payment is going to be. A preapproval keeps you in the driver’s seat, providing you a budget estimate and leverage before you get behind the wheel. Before you begin this process, learn more about what credit score is needed to buy a car.
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