Getting Preapproved for an Auto Loan
Getting pre-approved for a car loan is an important step to take before you start your search if you’re in the market for a new set of wheels. You’ll likely walk away with a better deal and a favorable interest rate on your loan, plus you’ll make the entire process smoother.
Here are several important benefits with a preapproval:
- Set a realistic budget. A preapproval tells you the exact amount of money you qualify to borrow and at what interest rate. Having this information in hand will help you budget for your new car with your monthly payments in mind.
- When considering your budget, it’s best to look for a car that falls slightly below your maximum loan approval amount, as you’ll need to reserve approximately 10% of the loan amount for taxes and fees. Also take your planned down payment into account since this can help offset the purchase price. Finally, when determining your monthly car expenses, be sure to include the costs of insurance, gas, and maintenance in your budget.
- Avoid dealer markups. Dealerships tend to inflate interest rates on loans in exchange for the convenience of buying a car and borrowing the money to pay for it in one location. Having your preapproval from an outside lender will help you avoid higher interest rates.
- Negotiate from a position of strength. When you hit the lot with your preapproval in hand, you’re shopping like a cash buyer. This places you in a stronger negotiating position since you’ll know exactly how much car you can afford.
- Avoid high-priced upsells. Having your exact loan amount in hand will help you avoid last-minute add-ons and unnecessary high-priced offers, which can increase the amount of the loan.
- Save time. Instead of finding out you’re not approved for a loan after you’ve already chosen your dream car, you’ll have buyer’s confidence and get behind the wheel in record time.
You can get your preapproval from any auto loan provider. This includes banks, credit unions and private lenders. Most lenders are more than happy to help you apply for preapproval.
Here’s how to get pre-approved for a car loan:
- Determine how much you want to borrow. You don’t need an exact number at this point, but you’ll want to have a ballpark figure to help your potential lenders base their decisioning.
- Prepare your documents and information. You’ll likely need to provide your lender with the following to complete your preapproval application:
- Residential address
- Social Security number
- Employment information, including employer name and gross monthly income
- A complete list of your assets and debts
- Basic description of the car you’d like to purchase
- An estimate of how much you’d like to borrow and your desired loan term
- Fill out the application. You can generally fill out a preapproval application online by visiting the lender’s website and searching for this option. If your lender does not offer this feature, visit the lender’s branch or office to complete out an application in person.
- Start shopping! Once you’ve gotten your preapproval, you’ll have 30-60 days to shop for a car before the preapproval expires.
What if I’m buying a used car through a dealer or private seller?
A preapproval can work for almost every kind of car purchase, whether it’s a new or used car. Most dealers will work with banks, credit unions and other lenders, and will be happy to sell you a car through these funding sources. You can enjoy the benefits of getting your preapproval before shopping for a used car at a dealer.
However, if you’re purchasing your car through a private seller or smaller dealer, things will be a bit different. For a private-party auto loan, you’ll generally need to select the car before you apply for financing. If and when you’re approved, the lender will pay the amount you owe to the seller, and you’ll then repay the lender over the life of the loan. Consequently, a pre-approval is not applicable in this scenario.