Advantages of Getting an Auto Loan Preapproval
If you’re in the market for a vehicle, consider getting pre-approved first. An auto loan pre-approval is a conditional approval from a lender that you receive prior to the finalized finance negotiation. Getting pre-approved for an auto loan has a number of benefits. But mainly, it gives you greater negotiating power as you approach the car buying and financing process.
With a pre-approval in hand, it’s easy to estimate the total cost of the loan and get your budget ready before you even start looking at vehicles in which you’re interested.
Before you can enjoy the benefits of pre-approval, however, it’s important to understand the difference between pre-approval and pre-qualification. A pre-qualification is a short skim of your credit history and borrowing amount to confirm everything’s in order.
A pre-approval, on the other hand, is much more thorough, diving deep into your financial statements rather than giving them a mere cursory glance. Just remember: Some lenders use these terms interchangeably, so make sure you know exactly what you’re getting into before that hard credit pull occurs.
Getting a loan pre-approval comes with a variety of benefits, but some advantages are more significant than others. We’ll review the most impactful benefits of getting an auto loan pre-approved.
Improved Negotiating Power
The primary benefit of a pre-approval is enhanced negotiating power when you apply for financing. Without pre-approval, many inexperienced buyers simply agree to whatever loan terms they can get, assuming something is better than nothing. The loan officers have the upper hand in the situation, but that can change if you get pre-approved.
With your pre-approval in hand, you won’t feel pressured to accept whatever offer you receive. Instead, you can use your pre-approval as a basis for negotiating your terms. You can gain even more leveraging power if you get pre-approved from multiple sources first. If the dealership is genuinely interested in your business, it’s likely to match or beat 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 that information, it’s easy to set a reasonable budget and avoid overestimating how much car you can get with your finances. With some pre-approval quotes, you’ll even get detailed information about how much you can put toward each aspect of the total cost with separate allocations for the car, title, taxes, and any additional fees.
Pre-approval quotes also include the interest rate and term of your potential loan, and that information is key to determining the overall cost. Consider the loan term, monthly payment, and interest rate to calculate how much you’ll have paid at the end of your loan term. Armed with that figure, you can compare various pre-approvals to determine which option saves you the most money.
One of the most important aspects to remember is you aren’t obligated to apply 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 money on hand to afford other expenses in life.
Easier Shopping
Shopping around for a vehicle is much easier when you already know what your budget can handle. Without getting pre-approved, you’ll be left wondering if you can truly afford the cars that interest you.
With a pre-approval, however, you can easily focus your car research specifically on vehicles within your budget. From there, you can explore the cars’ features and how well they fit your unique needs.
Faster Experiences
Getting pre-approved speeds up the entire car-buying process significantly. In fact, some dealership lenders can set you up with a good finalized loan in minutes if you come in pre-approved. That’s not always the case, of course, but getting pre-approved does accelerate the buying process because you’re not bogged down by questions about budget. Instead, you can simply focus on what the vehicle itself can offer.
Also, negotiation is easier and sometimes not even necessary with a pre-approval. Knowing what you can afford puts your budget in concrete terms and makes financing easier to understand, allowing you to skip several early steps in the negotiation process. Just remember that pre-approvals have time limits, so make your purchase before that deadline.
How To Get Pre-approved for a Loan
With the advantages of getting an auto loan pre-approval in mind, it’s time to take steps toward securing one for yourself. Fortunately, the process is fairly straightforward, allowing just about anyone to see what their budget is and the type of vehicle they can afford to purchase.
Credit Check
The first thing a lender is going to do, regardless of whether you’re looking for pre-approval or finalized approval, is check your credit. Make sure your credit score is in order before you try for pre-approval.
If your score isn’t as high as you’d like, you might still be able to get pre-approved for certain loan terms. Not all lenders operate the same way, so make sure you know whether they’re going to do a soft pull or a hard pull when they check your credit, because a hard check will show up on your credit history.
Gather Information
You’ll need certain pieces of information to apply for pre-approval, including your Social Security number, a form of state-issued identification, proof of employment status, and proof of income.
You’ll usually need to specify whether you plan to purchase a new or used vehicle. Note that some vehicles might not be eligible for pre-approval, such as those with very high mileage or certain models used for commercial purposes.
Shop Around
Don’t settle for a single pre-approval. It’s always better to get pre-approved from multiple sources before heading to the dealership to purchase a vehicle. It not only makes it easier to negotiate, but it also offers insight into your budget while accounting for any errors a single lender might make.
Wait for Pre-approval
After you’ve applied, all that’s left to do is wait. The wait time can vary based on your information and the lender from which you’re seeking pre-approval. 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 Get Pre-approved?
If you can’t get pre-approved anywhere, you can take steps to improve your chances the next time you try. You can accomplish this by raising your credit score. Even with a low credit score, it’s always possible to improve it by paying bills on time and not overusing your credit. The more secure your credit history, the greater your chances of getting pre-approved.
Your debt-to-income ratio is one of the most important factors lenders consider when deciding on loan terms and pre-approvals. You’ll want to keep this ratio as low as possible, which means the income you earn each month has a favorable ratio when compared to the number of monthly debt payments you make. Of course, pushing this ratio in your favor might not be easy, as it could require getting a higher-paying job or a second source of income.
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
