The process of buying a car involves a lot of research, as you narrow your choices to make, model, trim line, accessories and add-ons. The car purchase process takes a time commitment, but you can make it easier on yourself by getting preapproved for an auto loan.
Getting preapproved for an auto loan is ideal, because car dealerships and sellers tend to take you more seriously and provide you with more attentive customer service when they know you’ve gotten lender approval and are ready to buy. Preapproval for a car loan also gives you more bargaining power, as sellers tend to offer better deals when it’s been determined you can afford to buy.
By applying ahead of time, you also make it more likely you’ll get a better interest rate than you would applying at the dealership at the time of the sale.
Where to get preapproved for a car loan
A variety of preapproval financing options exist for auto loans. You can go to a brick-and-mortar bank or credit union, or apply online. Interest rates vary by type of lender, so it’s best to shop around. Some lenders offer loans for both new and used cars, as well as auto loan refinancing.
Follow these steps to getting preapproved for a car loan.
Check your credit score
The advertised interest rates for car loans are usually for people with excellent credit. There are lenders that give auto loans if you have bad credit but expect to pay a high interest rate. For instance, the rates at myAutoloan range from 1.99% to 27% annual percentage rate (APR), depending on your credit history and the type of loan you seek.
There are loan options for good credit (700+), fair credit (650-699), poor credit (600-649) and bad credit of less than 649. Check your credit score here.
Prepare your financial records
Before approaching lenders, gather your financial records. You need the following to apply for an auto loan:
- Proof of income.
Have on hand pay stubs from the last two or three months, as well as your W-2 or 1099 with proof of your annual income. If you don’t have check stubs or are self-employed, bring copies of your bank statements and the prior year’s tax returns. Make sure you have proof of any other income, such as child support or alimony, Social Security payments and income from rentals. The more income you make, the better chance you have of getting a favorable interest rate on your auto loan.
- List of loans and financial obligations.
To determine how much you can afford to pay monthly for an auto loan, lenders require information on all your loans, including mortgage payments, credit card balances and minimum payments and whether you owe any alimony or child support.
- Vehicle information.
If you’re buying a new car, you need the purchase price, make, model, year and vehicle identification number. For a used car, all of the above is required as well as the car’s mileage and information on any existing liens.
- Proof of insurance.
You must provide your insurance information to the lender. Full auto insurance coverage is required. This ensures the lender gets paid at least part of the loan balance in the event of an accident and total loss of the car.
- If you provided a down payment of less than 20%, which might give you a high loan-to-value ratio (LTV), the lender may also require you get GAP (Guaranteed Auto Protection) insurance. This pays the difference between what the insurance pays and what’s left on the loan.
Your best option is often approaching a bank, credit union or online lender in which you have a previous borrowing relationship. If you’ve paid your bills on time, they’ll probably want to lend to you again. It’s best to check with several lenders, though, as rates do vary.
As you get preapprovals for auto loans, try to get them done within a 14- to 45-day period. When you do this, the credit bureaus generally consider them as a single credit inquiry. This is important, because each time your credit is checked, your score lowers by a few points.
In the end, you may find the dealer can offer you a better loan than you initially received with your preapproval. For that reason, it’s a good idea to see what loan terms you can get through the dealer’s network of lenders. Even if you do decide to go with the dealer’s loan, it’s still a good idea to have the preapproval for comparison. This will help you make the best financial decision possible.
For information and examples of some of the best auto loans available, see SuperMoney’s auto loan reviews.