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Wouldn’t it be nice if you had most of the auto loan part done before you even walked into the dealership? Not only is getting preapproved for auto financing the best way to ensure you’re getting the greatest possible deal on your loan, it’s also a simple way to expedite the entire car-buying process itself, helping you get in and out of the dealership and into your new ride faster.
Here, we’ll give you an overview of how to get preapproved for a car loan as well as all the benefits that come with it.
How does a preapproved car loan work?
When a lender gives a preapproval for an 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.
Be aware that a pre-qualification and a preapproval are not the same thing. A pre-qualification is a soft offer in which most lenders do not pull your credit. If you have a pre-qualification and then do an official application, once you know the car you want, your actual loan offer might be very different, because lenders will do a hard pull on your credit and get a fuller picture of your credit history.
A preapproval, on the other hand, is a firm offer by a lender. Once you decide which car you want, the final loan offer should generally stay the same.
To apply for a preapproval, you can either go online directly to the lender’s website or go in person at a bank or credit union. 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 their rate.
If you are preapproved, the lender will tell you how much financing you qualify for, your loan APR and term. Now, you know exactly how much car you can afford before you start shopping for a particular model.
Why go through all that trouble before you head to the car lot? We’ll cover the benefits of approval next.
7 advantages of getting preapproved for a car loan
You know exactly how much car you can afford
You might try for a preapproved auto loan and find out you could actually borrow more than you thought, and get a better car than you planned. The reverse could be true, too. You could apply and find out you could only borrow some of what you thought. Either way, you’ll better know the vehicle price range you should be considering.
Remember the maximum loan amount the lender tells you that you’re preapproved for means just that — that’s how much the lender will give you to cover all the expenses of buying a car, not just the car’s sticker price. You have to account for the taxes and fees that will be charged as well. So if a lender tells you you can borrow a maximum $20,000, you should probably look for a car around $17,000, depending on your state’s taxes and fees.
You have the upper hand during negotiations
When you are preapproved for financing, you’ll know what you qualify for in terms of APR, so the dealership won’t be able to charge you a much higher APR. In fact, you’ll be able to tell the dealership you already have a loan preapproval, and challenge them to beat it and find a lower APR loan for you. This is a huge advantage over anyone who’s walking into a dealership without financing first.
You’ll know your rate and your monthly payment
If you know how much your loan will cost you, not just how much the car itself will cost, you can figure out your budget more accurately.
So if you think you’ll borrow $20,000 for 60 months, dividing it means your estimated monthly payment is $333. But that’s the monthly payment on the car; it doesn’t include the loan interest. If you know your APR is 5%, you can figure your actual monthly payment will be $350 by using an auto loan calculator like this one on LendingTree, the parent company of MagnifyMoney. (Note that some calculators have built-in assumptions with location and credit score that might give you a slightly higher payment than doing the straight math.)
A lot of the work can be done ahead of time
It’s hard to focus on paperwork and numbers when you’re tired from spending hours negotiating with a salesperson and test-driving cars at the dealership. By doing what is arguably the most difficult part of financing a car ahead of time, you’ve done your homework beforehand. All you’ve got to do is show the dealer your loan offer and see if they can beat that deal. Whether they can or not, you know you’re walking away with a good deal.
You’re not tied down to any one dealership
Getting preapproved for an auto loan gives you more freedom and time to check out different dealerships. By not being dependent on a dealership for financing, you can comfortably check out multiple dealerships if you want. With an auto loan preapproval, you know what your loan offer will be like without waiting for a dealership’s lender partners to respond.
You have a plan B
If the dealership isn’t able to beat your auto loan pre-approval or find a good offer, you shouldn’t be worried, because you already have an offer. Having a preapproved auto loan takes stress off you by serving as a fallback in case the dealership isn’t able to find a good loan offer for you or beat the one you have.
Overall, having a preapproved car loan offer lessens the stress of making such a major purchase. You’re able to know what you qualify for, plan your budget and do the work ahead of time so you aren’t pressured to get everything done in one day. And you know you won’t be fooled into paying a higher APR than you deserve.
Where to find a preapproved auto loan
A lot of lenders offer preapprovals for auto loans, but not all. Check online to make sure the lender you want to apply to offers preapprovals. Banks, credit unions and online lenders could all be possible sources. You may want to start with your current bank to see what kind of deal they offer but typically, you can find the best rates at online lenders and credit unions. It won’t hurt your credit to apply to multiple lenders, as long as you do so within a 14-day window.
Here’s a list of the best auto loans in 2018 if you want to check them out. Most preapproved loan offers are good for one month, so don’t start applying if you’re not ready to buy a vehicle within a month from the time you complete an application.
It’s smart to apply to a few places so you can compare offers. Don’t just do one and think that’s the best you can get. If you would like to compare to multiple offers at once, you can check out LendingTree, where you could possibly be matched with up to five lenders.
Applying for auto loan preapproval
To get preapproved for an auto loan, you’ll need to have some information on hand for the application.
- Personal details, such as address, date of birth and Social Security number
- Employment information: where you work and how much you make each month
- A basic idea of the vehicle you want, like if you want a new car or a used car
- Loan information, such as how much you want to borrow and for how long
- Account data: how much you have in your checking and savings account, and any other accounts, such as stocks, bonds and debts
What’s next? Buying a car with a preapproval
Take the preapproval with you when you go to officially pick out and buy your vehicle. Most preapprovals are good for 30 days. If you don’t use it to get a car by expiration date, you’ll have to apply again. Once you know exactly which car you want, you could do a couple of things.
The first is that you could tell the dealership about your preapproved auto loan and see if the dealer could beat what you already have. If the dealership can’t beat it, or if you already shopped around for your preapproval and know you want to go with that lender, then let your preapproval lender know exactly which car you want by contacting them on the phone or online. The lender will ask for a bunch of information on the car, such as the year, make, model, mileage and VIN.
Based on the car you want, the lender will tell you the final numbers with taxes and all, and guide you through finalizing the loan.