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Updated on Saturday, July 11, 2020
Before you head to the dealership to start shopping for new wheels, get preapproved for an auto loan. Doing so may help you save money, negotiate better deals and expedite your car-buying journey.
Getting preapproved for a car loan is easy — submit an application to a lender, like a bank or credit union, which will review your credit and let you know how much you’ll be able to borrow and at what interest rate.
- 7 advantages of getting preapproved for a car loan
- How do preapproved car loans work?
- How to get preapproved for a car loan: 5 steps
- Where to find a preapproved auto loan
7 advantages of getting preapproved for a car loan
1. You’ll understand your budget before your shop
Rather than kicking some tires at the dealership with only a vague idea of how much you should spend, getting a preapproval helps you figure out your car-buying budget. The lender will ask for the amount you want to borrow, along with information about your income and monthly bills. You may be approved for as much — or less — than what you requested, but knowing that number will help you avoid overspending or, on the flip side, miss out on a vehicle you really want and can afford. With an auto loan preapproval, you’ll know the total amount you can borrow.
TIP: Just because you can borrow up to a certain amount doesn’t mean you should. Aim for a vehicle priced 8%-10% below your preapproval amount to account for taxes and fees. There’s wiggle room here if you plan to make a down payment that would effectively cover those costs.
2. You’ll be protected from dealer markups
One of the secrets that dealers don’t want you to know is that they can and often do raise customers’ loan rates beyond what the lender charges, taking the difference as profit. An annual percentage rate (APR) that is one to two percentage points higher can send hundreds, even thousands, of dollars from your pocket into the dealer’s wallet. An auto loan preapproval cuts out the financing middleman, giving you a huge advantage.
3. You’ll be in a stronger negotiating position
Arriving at the dealership with your preapproved auto loan means the dealer has a choice: accept it or counter it with a better offer. If the dealership is able to offer a lower APR than your preapproved rate, you just shaved money off your borrowing costs.
But don’t stop there. Use your preapproval to negotiate a lower car price, too. When the salesperson asks for your preferred monthly payment, tell them you want to focus on the car’s out-the-door price instead. By keeping everyone’s focus on the car price plus fees, you’re sticking to your budget instead of a figure that the salesperson devises, one that may include extras you don’t want.
4. You’ll understand when you’re being upsold
It’s much easier for salespeople to upsell add-on products like rustproofing and window tinting when they only cause a $5 increase in your monthly car payment. If you’re focused on total costs, however, you can easily spot that the $5 bump adds up to $900 over time. And doesn’t the car shop down the street sell the same thing for $200?
When you have a preapproval, and the dealer wants to upsell you, they’ll have to clearly show the total price of the products they’re offering. If you want them, try negotiating for a better price.
5. You can shop at multiple dealers
Rather than being tied to the one dealership where you did a credit application with its particular lender partners, you can comfortably check out multiple dealerships without the hassle of filling out the same paperwork over and over. An auto loan preapproval is portable.
6. You’ll save time
No one likes to spend time at a dealership, but car buying can take the entire day if you’re not prepared. When you have an auto loan preapproval, you can cut to the chase — you already know your price range, down payment amount, maximum monthly payment, lender and APR. By doing what is arguably the most difficult part of car buying ahead of time, you should be able to cut down on time in the sharkpool.
7. You’ll cut down on stress
Having a preapproved car loan lessens the stress of making a major purchase. You know what you qualify for and won’t be fooled into paying a higher price or APR than you deserve.
How do preapproved car loans work?
When a lender preapproves your auto loan, it means the lender agrees to finance a car for you up to a certain amount, at a certain APR for a specific time.
Preapproval vs. prequalification
A prequalification is a soft offer in which most lenders do not pull your credit. This means your actual loan offer might be very different, because lenders will perform a hard pull on your credit and get a fuller picture of your credit history once you fill out the full loan application.
A preapproval, on the other hand, is a firm offer by a lender. The offer will include a loan term, APR, the maximum amount to be borrowed and an estimated payment. Some lenders require that you choose a specific car for the preapproval, but you could change the vehicle after you test-drive and decide on the car you want.
How to get preapproved for a car loan: 5 steps
Step 1: Figure out how much you want to borrow
You probably don’t need to know the exact car you want to buy, but it helps if you’ve got a figure in mind for how much money you want to borrow from the bank, credit union or online lender.
Step 2: Gather documentation
The preapproval application may ask for:
- Personal details, such as address, date of birth and Social Security number
- Employment information, including where you work and how much you make each month
- A basic idea of the vehicle you want (i.e. new or used)
- Loan information, including how much you want to borrow and for how long
- Your assets and debts, such as how much you have in your checking and savings accounts, or the value of your stocks, bonds and debts
Step 3: Fill out the application
Visit the lender’s website or go to a bank or credit union branch in person. You can request a preapproval from multiple lenders, which is a smart way to get the best deal possible. Some lenders, such as LightStream, even have a program where they’ll agree to beat any competitor’s rate you can find that’s lower than theirs.
Step 4: Shop with your preapproval
If you are preapproved, the lender will tell you how much financing you qualify for, your loan APR and term. The preapproval offer is likely good only for a certain time, typically 30-60 days, so it’s time to get shopping.
If the dealership beats your preapproval offer with a lower rate, or you change your mind about that particular lender or decide not to buy a car, you’re under no obligation to use the preapproval; simply let it lapse.
Step 5: Use your preapproval
If and when you use your preapproval, contact the lender and supply it with the information it needs about the exact car you purchased: year, make, model, mileage and VIN.
The lender will guide you through finalizing the loan.
Where to find a preapproved auto loan
Many lenders offer preapprovals for auto loans, including most of those on our list of best auto loans. Start with your current bank, but check with the competition, too — some of the lowest rates can be found at credit unions and online lenders.
It won’t hurt your credit to apply to multiple lenders any more than it does to apply to one, as long as you do so within a 14-day window. Some credit-scoring models allow up to 45 days. It’s smart to apply to a few places so you can compare offers. Don’t just fill out one application and think that’s the best you can get.