What is an auto loan pre-approval? And how to get it. – Forbes Advisor
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A car loan pre-approval is a conditional approval in which a lender declares that they are willing to provide financing, up to a specific price, to help you buy a car.
This pre-approval lets you shop for cars with a guaranteed loan amount in hand so you have a better idea of your price and dealers know you’re more ready to buy. Without pre-approval, even if you find a great car, you may not get the best loan deal.
Prequalification vs. preapproval for a car loan
Auto loan approval begins with prequalification, if available. Prequalification and preapproval are similar, but not interchangeable.
Prequalification: This is the first step in which you provide your personal credit and financial information to a lender without triggering a credit check. A lender will refuse you or accept your details, by pre-approving. If your information is accepted, you’ll see what terms you might be offering, including how much you can borrow and the interest rate. It is not an agreement to finance a loan, but a means of doing so.
Pre-approval: A pre-approval is a loan request that has been approved. You’ll complete an application, trigger a credit check to verify your credit details, and view loan information to share with potential dealers. The lender will write a letter of offer for a specific amount that will last about 90 days unless something drastic changes your credit, like applying for a home loan or a credit card during that time.
How to get pre-approved for a car loan
Having pre-approval in hand gives you the power to walk into a dealership and get the car you want without the overhead or stress of haggling with the dealership for financing. Conversely, it can sometimes help you negotiate better financing terms at the dealership (more details below). You can be pre-approved by:
- Checking your credit. Before completing an application, check your credit score and correct any errors or look for ways to improve your score, if necessary. The better your credit score, the better your chances of getting pre-approved for a car loan and getting the lowest interest rate available.
- Gather your documents. Typically, the lender will ask for your legal identification, such as a driver’s license; verification of employment and income; your current expenses and debts; and your credit history. You can speed up the pre-approval process by having this information ready before you apply. You may need to include recent tax documents, employer W2s, bank statements, or other forms of verification.
- Compare lenders. You can apply for a loan pre-approval multiple times within a 14 day period, and it will only cause one serious inquiry into your credit report, as the credit bureaus will identify it as a rate buy when it is tied to the same product purchase. Fill out a few applications so you can compare offers, both from online options and from your personal banking provider. If you already have a vehicle in mind, you can include it in your pre-approval request.
- Head to the dealership. With your best pre-approval letter in hand, you can head to a dealership to browse vehicles that fit your budget. Once you have found a car, you can fill out a loan application. Keep in mind that some lenders have limits on which vehicles they will or will not finance. Before you pre-approve, you need to know about these restrictions, which are usually based on a vehicle’s age and mileage.
How to buy a car after pre-approval
With pre-approval in hand, you know exactly how much car you can afford. Before heading to a dealership, you might want to explore cars in your price range by doing an online search. Many dealerships list inventory on their websites, allowing you to view cars and prices from home.
Once you’ve figured out which car best suits your budget and needs, you can head to a dealership for a test drive. If you’re not an in-person buyer, you can skip the visit to the dealership altogether and buy your car entirely online.
Once you’ve found the best fit, your car salesman will refer you to a CFO. Keep in mind that there is room for a few changes before you finalize financing and drive away with your new car. For example, your terms may change from three to five years, which may give you a different interest rate than what was stated in your pre-approval.
Tips for Negotiating Using a Car Loan Pre-Approval
Your pre-approval letter not only provides the car dealer with proof that you can obtain financing, but it also helps you better negotiate with the dealer’s finance office to take advantage of all kinds of extras or reduce hidden costs such as :
- Extended terms: Your dealership may offer you a longer-term loan than what you’re pre-approved for so you can lower your monthly payments by spreading them out longer. This means you’ll likely pay more interest over the life of the loan, but you don’t have to accept the offer.
- Lower your interest rate: Most dealerships work with multiple lenders at their finance office and can essentially shop the rates for you. Sometimes that means they can offer you a lower rate than you originally had in your pre-approval terms.
- Expensive cars: Some dealerships may want to convince you to buy a more expensive car than you can afford, depending on your pre-approval limit. Remember, your letter shows the amount you’re pre-approved for, and you can tell the dealer that’s your fixed amount or work with them to negotiate a better deal for you.
Even if you don’t opt for the financing option at the dealership, it’s always a good idea to ask what they can offer. You don’t have to commit to the dealer’s offer or even the lender who offered the initial pre-approval if you find a better deal.