What to know about pre-approved car loans

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Pre-approved auto 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 consider the potential pitfalls of pre-approved loans, such as no guaranteed approval if your finances change between application and full loan underwriting, before applying with a lender to make sure it makes sense for you. .

What is a pre-approved car loan?

Pre-approved auto loans are loan products that have already been conditionally approved by the potential lender. This means that the lender has already decided to grant you the loan, assuming there are no drastic changes in your financial situation before the loan closes.

The pre-approved auto loan offer letter will detail the interest rate, auto loan amount, and loan terms the lender is willing to give you. So you can drive to the dealership like a cash buyer would with a good understanding of how much you can spend on a new ride. This can also be used to negotiate if you also want indirect financing through the dealership. Just be sure not to show your hand too soon – wait for the price of the car to be negotiated.

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 most requests are typically processed within 30 minutes. As a result, you can shop around with multiple lenders and compare offers to find the best loan rate. 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-approvals give 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 than their competitors in an effort to win over your business.

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 you will have an estimate of your monthly payment amount before you go to the dealership. You will know how much car you can afford.

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.

You are not guaranteed funding

Pre-approval for a car loan is conditional – there is no guarantee that the lender will fund the loan. Expect to provide additional information and supporting documents before receiving final approval. If there are discrepancies in the application and documentation or if your credit rating drops significantly, you may be denied financing.

Your credit score can disqualify you

If you have bad credit, you may find it difficult to get pre-approved for a car loan on competitive terms. Still, it’s worth shopping around before you go to the dealership to find out which lenders might be willing to work with you.

You may be limited to a specific reseller

Pre-approval for a car 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. In some cases, this can be very expensive, especially if you find a much better deal on a used vehicle from a private seller.

You’ll miss manufacturer financing offers

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

The following steps make it easier to get pre-approved for a car loan if you meet the lender’s eligibility criteria:

  1. Determine your budget. The first step is to figure out how much you’re willing to spend on a car. Look at your budget, including your monthly income, expenses, and other bills to get a figure, and don’t forget to include fuel, insurance, maintenance, inspection, repair, and maintenance costs. registration.
  2. Gather your supporting documents. Have your pay stub, employer information, and all personal information — like your name, social security number, date of birth, and address — handy when you apply. This will help avoid hiccups when applying.
  3. Compare the prices. Find at least three lenders that offer the loan amount and term you are looking for. Don’t settle for the first lender you find and check customer reviews to see if there are any red flags.
  4. 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.
  5. 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.

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