In the market for a new car? Before stepping foot on the dealership lot, you should know about getting pre-approved. Sure. Sounds good. But how do you get pre-approved for a car loan? This guide explains the benefits of prequalifying and how to go about it.
Using this strategy, you can potentially lower the amount you pay for both your car and the financing used to buy it. Here’s everything you need to know so you can get a car at the best deal.
How do you get pre-approved for a car loan?
What does it mean to be pre-approved for a car loan? It means, before you go shopping for a car, you get approved for a loan that you can use to purchase it.
By getting their loan first, a consumer can shop as a cash buyer with the opportunity to purchase any vehicle within their budget.”
How do you get a car loan from the bank? You can apply with a traditional bank, credit unions, or online financial companies like LightStream and Prosper.
In most cases, you can apply within minutes on their websites. Simply give them your basic information, and they will perform a soft credit check. If approved, you will receive an offer.
With that offer, you can shop for a car with the negotiating power of a cash buyer. Todd Nelson, Business Development Officer at LightStream says, “By getting their loan first, a consumer can shop as a cash buyer with the opportunity to purchase any vehicle within their budget.”
Use SuperMoney’s pre-qualification loan engine to get competing auto loan offers from top lenders in a matter of minutes (this will not affect your credit score).
Benefits of getting pre-approved for a car loan
Why get pre-approved when you can just walk into the dealership and have them take care of the financing and car purchase all in one place? Here are three reasons.
1) Dealers’ incentives are not aligned with yours
When you go to the dealership to buy a car and get it financed, you are pretty much at their mercy. They have all the cards and they work out a deal that best suits THEM.
You don’t really want a biased person arranging your financing. They can make more commission by doing things that aren’t necessarily in your best interest.
2) Lower interest rates
When you get pre-approved, you are taking the cards back. You can research a number of different lenders, compare the rates and terms they will offer you, and choose the one that best suits YOU.
Instead of taking the one offer on the table, you will be finding out for yourself what is available. That’s not to say you shouldn’t apply and see what the dealer will offer you. But having a number of other offers will help you get the best deal.
Auto loan pre-qualification engines, like the one provided by SuperMoney, help people to easily and quickly find the best deal.
You’ll answer a few questions, and the loan engine’s algorithm will figure out which lenders are a best fit. You then receive a list of offers from top lenders all competing against each other for your business. Talk about turning the tables.
3) More leverage in price negotiations
Once you have found the best deal on financing, you will know how much you can borrow. This will allow you to set your budget for the total cost of the car.
Dealers will often try to sweeten a financing offer by lowering monthly payments and increasing the term of the loan, which can end up costing buyers more. As a prequalified buyer, you can direct the conversation to the total cost of the car.
If you got approved for $25,000 but only want to spend $20,000, that’s no problem. When negotiating the price with a seller, they won’t know the full amount available to you.
Without knowledge of that magic number, you can make your cash offer and, for all they know, that is all you have. They will be more inclined to come down toward your buying price.
On the other hand, when a dealer has all the information about how much you can possibly get in the financing, they have no reason to discount the price of a car. They know they can max out your financing to cover the higher cost and use strategies like extending the loan term to lower monthly payments.
So, by getting pre-approved, you can avoid conflicts of interest and gain more leverage in negotiating the price of the car.
How does a car loan from a bank work?
When you get pre-approved for a car loan from a bank, how exactly does it work? They will typically provide you with a check or an offer letter that you can use that to purchase the car. In some cases, you may even get the amount transferred into your bank account.
Once you make the purchase, you or the bank will transfer the money to the seller of the car to pay for it in full. Then, you will begin making monthly payments to the bank.
The payments will be for the principal cost of the loan, as well as the additional interest charges at the agreed-upon rates and any fees. Payments will continue for the full-term of the loan unless it is paid off early.
Get pre-approved for a car loan
Ready to start comparing lenders? Head over to our Auto Loans Review Page, where you’ll find a long list of detailed reviews on top auto loan lenders.
To find out what offers you qualify for and which is best, start with the auto loan pre-qualification tool.
Getting pre-approved for a car loan is the way to go. It helps you get the best deal possible on the purchase of your next vehicle. And you’re now one step closer to making it happen.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.