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Before you go car shopping, make time to get preapproved for an auto loan. Why?
It’s better to be surprised — either by the interest rates you’re offered or whether you’re approved at all — before you go to the dealership. You can address any issues ahead of time.
Auto loan preapproval gives you leverage at the dealership, so you can get the best interest rate possible. Let the dealer try to beat or match the rate and terms.
Preapproval brings peace of mind that you got the best loan possible.
It’s easy to get preapproved for a car loan with credit unions, banks or online lenders before you head to the dealership. Here’s why you should and how to get started.
» COMPARE: Compare auto loans, rates and lenders
Why you should get preapproved for an auto loan
Get help setting a realistic budget
Getting preapproved for an auto loan helps you set a realistic budget for your car purchase, because it lets you know how much you can borrow and at what interest rate. But you don't have to spend the whole amount, either.
Once you get the amount you’re preapproved for, that doesn’t mean you can afford to buy any car with a listing price up to that number. You’ll need to factor in taxes and fees, which can be estimated by adding 10%. Any down payment and trade-in amounts will help offset the price.
With all of this information, use an auto loan calculator to estimate your monthly payment. Make sure your car payment will fit into your budget, and if it doesn’t, look for a less expensive car. And don’t forget, your total car expenses — also including insurance, gas and maintenance — will be more than just your loan payment.
Any loan approval you get is an up-to amount for what you can finance. The vehicle still must meet the lender's requirements for age, mileage and loan-to-value ratio (LTV).
Find a preapproved car loan
Get protection from financing markups
Dealer financing is convenient, but if you haven’t shopped around, a dealership finance manager might take advantage of that by marking up your interest rate. Dealers have a number of lenders they work with at predetermined rates for a given financial profile. They can add a certain amount — as much as 1 or 2 percentage points — to your approved rate. That can add up to hundreds of dollars over the life of your loan.
By getting preapproved, you’ll know you’ve gotten the best interest rate you can qualify for and be able to judge if the dealer is offering you a good deal.
You’ll want to fill out a credit application at the dealership anyhow. The dealer may be able to beat your rate. Often, dealers have access to cheaper financing through “captive lenders” — banks set up by the car companies just to make auto loans — which can offer rates that are lower than those at other banks.
Strengthen your negotiating position
With your lender-approved blank check or certificate in hand, you’re transformed into a “cash buyer” at the car lot, putting you in a much stronger negotiating position. You already know what the monthly payment for your loan amount might be, so you don't have to play any games with the dealer around, "What monthly payment did you have in mind?"
Instead, you can concentrate on the out-the-door price.
If you've got a trade, shopping around for online offers to properly value your old car will put you in a stronger position there, too.
Get an ever better rate and avoid upsells
As you’re negotiating and closing the deal, when you’re signing papers in the finance and insurance office, you can use your preapproval as an easy way to deflect add-ons and extended warranty offers that you don’t want.
Just say: “I’m preapproved for this amount, and I’m not going to go over it.”
Pre-qualification vs. preapproval for auto loans
Getting preapproved for an auto loan is more serious than getting pre-qualified and should be done when you’re ready to buy.
Pre-qualification is a low-risk way to find out what kind of loan you could get, especially if you don’t know your credit score. It only requires a “soft” credit pull, so you can get a ballpark estimate of the rates you might get without damaging your score. But rates aren’t guaranteed — they can only be as accurate as the limited information you provide for pre-qualification, so your final rate could be higher.
In general, wait to get preapproved until you’re serious about buying a car, and know your credit score because applying will have a small impact on your credit. While neither guarantees funding, both can be good indicators of your ability to secure financing and help determine how much car you can afford.
Shopping auto loans: preapproval vs. pre-qualification
Preapproval means a lender has reviewed your credit report (not just the score) and other information to determine a loan amount and rate you’re likely to receive.
Preapproval quick facts:
Pre-qualification means you're likely to receive a loan at a given rate (or within a wide range) based on limited personal and financial information. It's not an offer to fund you.
Pre-qualification quick facts:
How to get preapproved for a car loan
Where to get preapproved for a car loan
You can apply to get preapproval for an auto loan online, over the phone or in person at a bank or credit union. If you already have a relationship with a bank or credit union, it’s a good idea to apply there.
Aim to get preapproval from two or three lenders so you can pick the best interest rate, and submit all your applications within 14 days. Even though preapproval requires a hard credit pull, if multiple lenders request your report within a short time, they count as one inquiry. It’s a good idea to check your reports again afterward to ensure there aren't any errors.
What you need to get preapproved for a car loan
Applying for preapproval can be similar to filling out an application for a car loan, and some financial institutions may require more information than others. Here’s what you (and any co-applicants) should have ready when you apply:
Personal information, such as your name, date of birth, contact information and Social Security number.
Housing details, such as your address, how long you’ve lived there, whether you rent or own, and your monthly housing payment.
Income and employment information, such as your gross annual income, employment status and employer’s name, if applicable.
Loan details, such as your how much and how long you want to finance.
Trade-in information, if applicable, such as the title and registration of your vehicle.
Preapproved offers are typically good for 30 to 60 days, and you can always decline your preapproved offer if the dealer can beat it.