If you are looking for a vehicle, consider getting pre-approved first. An auto loan pre-approval is a conditional approval from a lender that you receive before the financing negotiation is finalized. Getting pre-approved for an auto loan has many benefits. Most importantly, it gives you greater bargaining power as you approach the process of buying and financing a car.
With a pre-approval in hand, it’s easy to estimate the total cost of the loan and prepare your budget before you even start looking at the vehicles you are interested in.
However, before you can enjoy the benefits of pre-approval, it is important to understand the difference between pre-approval and pre-qualification. A pre-qualification is a brief overview of your credit history and loan amount to confirm everything is in order.
A pre-approval, on the other hand, is much more in-depth, diving deep into your financial statements rather than just giving them a cursory glance. Remember: some lenders use these terms interchangeably, so make sure you know exactly what you’re getting into before a big credit demand occurs.
Getting a loan pre-approved has a variety of benefits, but some benefits are more important than others. We’ll go over the most important benefits of getting a pre-approved car loan.
Improved bargaining power
The main benefit of pre-approval is increased bargaining power when applying for funding. Without pre-approval, many inexperienced buyers simply accept whatever loan terms they can get, assuming something is better than nothing. Loan officers have the upper hand, but that may change if you’re pre-approved.
With your pre-approval in hand, you won’t feel pressured to accept the offer you receive. Instead, you can use your pre-approval as a basis for negotiating your terms. You can get even more leverage if you get pre-approved from multiple sources first. If the dealership is genuinely interested in your business, they’ll likely match or exceed another lender’s pre-approved rate.
Set a realistic budget
When you get pre-approved, you’ll know how much you can afford to spend on a new car before you shop. With this information, it’s easy to set a reasonable budget and avoid overestimating how many cars you can get with your finances. With some pre-approval quotes, you’ll even get detailed information on how much you can spend on each aspect of the total cost with separate allowances for car, title, taxes and any additional costs.
Pre-approval quotes also include the interest rate and term of your potential loan, and this information is essential in determining the overall cost. Consider the term of the loan, monthly payment, and the interest rate to calculate the amount you will have paid at the end of your loan term. Armed with this figure, you can compare various pre-approvals to determine which option saves you the most money.
One of the most important things to remember is that you don’t have to ask for the full amount of your pre-approval. In fact, it’s often safer to borrow less than your pre-approved amount to give yourself that extra financial cushion and ensure you have more cash on hand to pay for other expenses in life.
Shopping for a vehicle is much easier when you already know what your budget can handle. Without being pre-approved, you’ll wonder if you can really afford the cars you want.
With a pre-approval, however, you can easily focus your car search specifically on vehicles within your budget. From there, you can explore the cars’ features and how well they meet your unique needs.
Getting pre-approved significantly speeds up the entire car buying process. In fact, some dealership lenders can get you a good loan finalized in minutes if you’re pre-approved. That’s not always the case, of course, but getting pre-approved speeds up the buying process because you’re not bogged down with budget issues. Instead, you can just focus on what the vehicle itself can offer.
Plus, negotiation is easier and sometimes not even necessary with pre-approval. Knowing what you can afford helps put your budget in concrete terms and makes it easier to understand financing, allowing you to skip several early steps in the negotiation process. Remember that pre-approvals have time limits, so make your purchase before that deadline.
How to get pre-approved for a loan
With the benefits of getting an auto loan pre-approved in mind, it’s time to take steps to get one for yourself. Fortunately, the process is quite simple, allowing almost anyone to see what their budget is and what type of vehicle they can afford.
The first thing a lender will do, whether you are seeking pre-approval or final approval, is to check your credit. Make sure your credit score is in good standing before trying to get pre-approved.
If your score is not as high as you would like, you may still be able to get pre-approved for certain loan terms. Not all lenders operate the same, so make sure you know if they are going to do a soft draw or a hard draw when they check your credit, as a hard check will show up on your credit history.
You will need certain information to apply for pre-approval, including your social security number, state-issued identification, proof of employment status, and proof of income.
You will usually need to specify whether you plan to buy a new or used vehicle. Note that some vehicles may not be eligible for pre-approval, such as those with very high mileage or certain models used for commercial purposes.
Compare the prices
Don’t settle for just one pre-approval. It is always best to get prior approval from Several Sources before going to the dealership to buy a vehicle. Not only does this make it easier to negotiate, but it also gives insight into your budget while taking into account the mistakes that a single lender could make.
Wait for pre-approval
After applying, all you have to do is wait. The wait time may vary depending on your information and the lender you are requesting pre-approval from. Some will have your pre-approval ready in minutes, while others might take days to contact you with their decision.
What if I can’t be pre-approved?
If you can’t get pre-approved anywhere, there are steps you can take to improve your chances the next time you try. You can achieve this by increasing your credit score. Even with a low credit score, it’s still possible to improve it by paying bills on time and not abusing your credit. The more secure your credit history, the more likely you are to get pre-approved.
Your debt-to-equity ratio is one of the most important factors lenders consider when deciding loan terms and pre-approvals. You’ll want to keep this ratio as low as possible, which means that the income you earn each month has a favorable ratio to the number of monthly debt payments you make. Of course, pushing this ratio in your favor might not be easy, as it might require getting a better paying job or a second source of income.
Elizabeth Rivelli is a freelance writer with over three years of personal finance and insurance experience. She has in-depth knowledge of the different branches of insurance, including automobile insurance and property insurance. His byline has appeared in dozens of online financial publications, including The Balance, Investopedia, Reviews.com, Forbes and Bankrate.