In the search for a new car? If you plan on financing your purchase, consider getting pre-approved for a car loan before you start looking. This is an often-overlooked part of the buying process that strengthens your negotiating position and helps you avoid markups at the dealership.
To learn more about the ins and outs of pre-approved car loans, we enlisted the help of Kevin Garraway, an underwriting manager at Amplify Credit Union. He broke down the process of getting a pre-approved car loan and how it can help you when buying a new set of wheels.
What Is a Pre-Approved Car Loan?
Much like pre-approval for a home mortgage, auto loan pre-approval isn’t a requirement for purchasing a new car or even getting the loan. A pre-approved car loan means that a lender has already okayed you to borrow a certain amount, even if you haven’t picked out the car that you want to purchase yet.
Before you even step onto a car lot, you’ll know exactly how much you can borrow.”
It lets dealerships know that you have gone through the lender’s process to obtain the loan, and therefore will be granted only the specified amount.
You may have also heard the term “loan pre-qualification.” Car loan pre-approval is not the same as being pre-qualified. With pre-qualification, a lender will use basic information to provide rates and terms. Unlike pre-approval, this is not a hard offer because the lender doesn’t perform a hard inquiry on your credit. Because pre-qualification doesn’t lock in any rates or amounts, you won’t have the same negotiating power with the dealership.
Why Should You Get Pre-Approved for a Car Loan?
Several advantages come with car loan pre-approval. These range from being prepared to saving time at the dealership. Here are five of the most significant benefits of getting pre-approved ahead of time.
You Know what to expect
Pre-approval takes away the stress of the unexpected. Before you even step onto a car lot, you’ll know exactly how much you can borrow, what your loan payments will look like, and what the loan term will be. This can help narrow down your choices to what’s within your budget and help get your finances in order for the coming months.
However, not everything is set in stone. “If the amount you need to borrow changes or the vehicle you want to buy changes, just reach out to the same person you have had communications with during the approval process,” Garraway reminds us. “These are easy items to update, and a new decision will happen quickly.”
You put yourself in a good negotiating position
A loan pre-approval makes you a cash buyer when you arrive at the dealership. This gives you the upper hand and puts you in a great position to negotiate the best price with the dealership. “Part of the deal is agreeing to price/terms, and the other part is getting financing arranged,” Garraway explains. “If the latter has already taken place, then you have done much of the hard work already.”
Dealers also know that your pre-approval will be accepted at any other dealership. If you aren’t satisfied with the services or prices, they know that you can easily take your business elsewhere and still get the same rates. “Knowing someone has already been approved on a loan increases the incentive to make a deal happen for car sales and management,” Garraway says.
You avoid markups at the dealership
Without being pre-approved for a loan amount through a third-party lender, you may also be tempted to utilize the dealership’s financing program. “Many times, the dealer has special rate financing like the 0% programs we have all seen advertised,” Garraway says.
Deals like that can be hard to pass up, but what dealerships often don’t disclose is markups and upsells that can leave you spending way more than initially intended. “Do not believe it if a dealer tells you the only way to get the 0% or other low rates is to purchase additional products,” Garraway adds. Even if you do want add-ons like a gap policy or a warranty, these are often cheaper if you finance through a bank or credit union.
You spend less time at the dealership
No one likes to spend their Saturday afternoon standing around a car dealership. Being pre-approved allows you to skip the dealer financing portion of the negotiations, meaning you get to hit the road in your new ride sooner.
You have the freedom to buy what you want
If you find a reasonable interest rate through a dealership, you are limited to the inventory they have on hand. If you don’t see the car you want there, you are not guaranteed a similar rate at the dealership next door. Loan pre-approval, however, comes from a third party institution, which means that you have the freedom to purchase the car from wherever you want.
How Do You Get Pre-Approved for a Car Loan?
You can start your search for auto-loan pre-approval by checking rates across multiple lenders. These can include local banks, credit unions, and online lenders. They’ll have you fill out a loan application that asks several questions about your financial situation and request documents to back up your statements.
Be prepared to provide our info like your social security number, driver’s license, employment status, income, and your credit history. This is all information that you would need to provide when applying for a loan anyway and isn’t unique to the pre-approval process.
Additionally, Garraway says that the following pieces of information are helpful to note on your application:
- Your down payment amount. Note the amount, if any, that you intend to put down. This will affect your monthly payments.
- Whether or not you are trading a car that has a loan balance. List the amount and the lender.
- Any recent debt repayments. Your most recent debt repayment may not be captured on any credit reports, but this is information a lender will want to have.
Keep in mind that pre-approvals don’t last forever. They typically last less than 60 days, so you should only seek pre-approval when you’re ready to buy. On top of this, hard inquiries on your credit report can have a negative impact on your credit score, so you’ll want to save those until you’re ready to make a purchase.
Getting preapproved for a car loan can come in handy if you’re ready to purchase a new car. It’ll give you peace of mind that you have other financing options available to you when you walk through the dealership doors. This will provide you with the upper hand when it comes to negotiations and help you resist any markups or up sales that a dealer may throw at you.