Auto Loan Pre-Approval
If you’re in the market for a new car, there are ways you can prepare for your big purchase before even setting foot on the car lot. If you get pre-approved for a car loan before visiting a dealership, you’ll have more bargaining power when you find the car you want. You can be approved for a loan without accepting the offer, and going through the pre-approval process gives you an idea of what you can afford.
When you attempt to get an auto loan pre-approval, you’ll feel more prepared since you’ll understand your budget and what you can afford. It’s important to remember that you aren’t required to borrow the full loan amount you qualify for. While it’s tempting to spend at the top of your budget, be disciplined so you can get your car but stay financially secure.
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What Does Pre-Approved Mean?
A pre-approved car loan is a loan that’s completely set up and ready for your approval. When you get pre-approval for a loan, the financial institution has already analyzed your financial history and provides you with a loan offer. In most cases, with a pre-approved loan, your paperwork is already set up and the only thing that’s left to do is finalize the details and sign the contract.
To obtain a loan pre-approval, the financial institution performs a hard credit inquiry to determine the loan amount and terms you qualify for. Getting pre-approved for a loan helps you determine your budget and makes the loan process faster. With a loan approval in hand, once you’ve chosen your car and the loan amount you need, the paperwork can be processed quickly.
Pre-Approved vs. Pre-Qualified
While the terms “pre-qualified” and “pre-approved” sound similar, they aren’t interchangeable. When you’re pre-qualified, the potential lender performs a soft credit pull instead of a hard credit inquiry and only limited financial information is used. While you’re offered loan terms during the prequalification process, the terms you’re provided with aren’t set in stone. If you decide to apply for the loan, these terms can change after a hard credit inquiry is completed.
When you’re pre-qualified for a loan, however, all the backend work, including your credit inquiry, is complete. Therefore, the terms you’re offered in the pre-approval will remain, including the interest rate and loan amount. Most of the legwork is done during the pre-approval process, making the completion of the loan quick and easy when you’re ready.
Benefits of Pre-Approval
When you’re pre-approved for a car loan, your car shopping experience is easier, faster, and more effective. Since you know how much you can afford to borrow, you can easily narrow down your car search to focus on getting the right car that meets your needs.
Help Set Your Budget
One of the best advantages of getting pre-approved for a car loan is that it helps you set your budget. When you know what you can afford, you won’t be distracted by cars that are out of budget. Your pre-approval will guide you to a specific price range and you’ll know which cars you can afford and which models you’ll need to pass on.
Greater Negotiating Power
Most dealerships have ties to financial institutions so they want you to finance your car through their own bank. If you already have a pre-approved car loan through another financial institution, you have stronger negotiating power. The dealership’s bank will need to offer you better loan terms or the dealer will need to provide you with other incentives to get you to choose their financing offer over your own.
With a pre-approved car loan, you have choices. You can review what the dealer offers and figure out which loan best meets your needs and budget. This helps you feel less pressured and more confident when you visit a dealership to shop for your car.
Act Like a Cash Buyer
When you use a loan from a financial institution for a car purchase, the bank provides the dealership with the money for the car and you pay the loan back to the bank. Essentially, you’re a cash buyer since the dealer will get the lump sum for the car at the time of purchase. This gives you flexibility and the upper hand when choosing your car.
Since you have a loan pre-approval, you won’t feel like you’re stuck with one dealership due to its financing options. You can shop around with multiple dealers and take your time finding the car you want and the dealership you want to do business with.
How to Get Pre-Approved on a Car Loan
To get pre-approved for a car loan, you’ll need to follow certain steps to complete the process.
Requirements for Pre-Approval
Your financial institution will require you to provide specific pieces of information or documentation, including:
- Your Social Security number: This allows your bank to complete a hard credit inquiry and check your credit report and score.
- Your salary and income information: The income you earn is important because it determines the loan amount the financial institution thinks you can afford.
- A summary of your debts: Your current debts are also important because the financial institution wants to be sure you’ll be able to make loan payments.
Where to Get Pre-Approved
There are a few different lenders you can shop your loan with before deciding on the terms you’re comfortable with. You should attempt to get pre-approved for a car loan through:
- Banks: Financial institutions, especially big-name banks, have financial security, so they can usually offer you enticing loan terms.
- Credit unions: If you have a relationship with a credit union, your history with the institution can usually work in your favor to get you a higher loan amount or lower interest rate.
- Online lenders: Getting pre-approved for a car loan through an online lender is a quick and easy process and you can access your loan details from anywhere.
No matter which lender you choose for your car loan, a pre-approval can make your shopping process easier and faster. When you’re pre-approved for a car loan, you have more negotiating power, a better idea of your budget, and the confidence to take your time and shop around for the car you want.
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This post was updated January 15, 2020. It was originally published January 15, 2020.