Pre-approved car loans are a great way to save money when buying a car. Simply, these are loans that have already been approved by the potential lender. With a good understanding of how much you can spend, it allows you to shop around for the best interest rate and loan term.
A pre-approved loan also puts you in the driving seat when it comes to negotiating the initial price of the car. But before applying for pre-approval, consider the potential pitfalls of pre-approved loans, such as being unsecured.
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. It allows you to enter the dealership as a cash buyer would.
The pre-approved auto loan will detail the interest rate, auto loan amount, and loan terms the lender is willing to give you. This can also be used to negotiate if you also want indirect financing through the dealership.
Benefits of a pre-approved car loan
A pre-approved car loan offers several advantages to you as a borrower.
You can compare car loan interest rates
The pre-approval process is streamlined and typically processed within 30 minutes. As a result, you can search for the best loan rate and compare it with other lenders. Just make sure all complete inquiries are made within two weeks so they don’t count as multiple inquiries on your credit report.
You can get a better interest rate
Pre-approval gives lenders an idea of what other institutions are willing to lend you. If your credit is strong enough, some lenders may offer you a better interest rate to entice you to choose them.
You have perfect control of your monthly payments
Being pre-approved means you’re already set in terms of how much you’ll borrow, your interest rate, and the length of the loan. This means that your monthly payment amount is already sorted.
You will have the bargaining power of a cash buyer
Since you’re not relying on the dealership for financing, you can focus on negotiating the upfront price rather than the monthly payment. Remember not to show your hand too soon in terms of how much you are willing to pay.
Disadvantages of a pre-approved car loan
Pre-approved auto loans have potential pitfalls. Here’s what to watch out for.
- Not guaranteed. A pre-approval on an auto loan is not a guarantee of approval. As you go through the pre-approval process, you may need to provide additional information and supporting documentation before it is finalized. And if your credit takes a hit between the time you’re pre-approved and the time you go to finalize the loan, you might be out of luck.
- Bad credit can disqualify you. If you have bad credit, you may not qualify for pre-approval. It’s always worth shopping around before you head to the dealership, but you may have a harder time finding a lender willing to pre-approve a loan.
- Matched pairs. A pre-approval on an auto loan usually applies to a specific dealership or set of dealerships, which means you probably won’t be able to buy from a private seller.
- No manufacturer financing agreement. If you have excellent credit and choose to go with external financing, you will not be able to take advantage of a 0% financing offer if available. However, just because you’re pre-approved doesn’t mean you have to borrow money.
How to get pre-approved for a car loan
There are a few main steps you need to follow in order to get pre-approved for a car loan.
- Determine your budget. The first step is to figure out how much you’re willing to spend on a car. Review your budget, including your monthly income, expenses, and other bills.
- Gather your supporting documents. Have your pay stub, employer information, and all personal information handy when you apply.
- Compare the prices. Find at least three lenders that offer the amount and term you’re looking for. Don’t settle for the first lender you find and check customer reviews to see if there are any red flags.
- Apply for pre-approval. Once you’re ready to apply, you can visit your lenders’ websites or go in person to get pre-approved. You will probably need to fill out a few forms. Be prepared to spend at least 15 minutes on each application.
- Visit your local dealer. You can then shop for a car, knowing exactly how much you can afford.
The bottom line
If you’re looking for a car, getting a pre-approved loan can save you money and stress. While it can’t guarantee you’ll get the exact vehicle you want, it will give you a head start in the competitive car buying process by allowing you to walk into the dealership knowing exactly how much you can afford. allow you.