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While many people fear getting a raw deal from a car salesperson, the real damage can be done when the finance manager sets up your loan. But getting preapproved for a loan before you go car shopping can protect you against this financial sleight of hand.
“Auto financing is the last pocket of consumer finance that is truly opaque, and it is opaque for good reasons,” says Jon Friedland, chief executive of auto loan company Outside Financial. The more confusing the process is, the more consumers can be taken advantage of, he says.
But even some car dealers favor preapproval. “I always suggest that you apply for financing with your bank or credit union before you go car shopping,” says Michael Bradley, fleet internet sales manager at Selman Chevrolet in Orange, California. “Then let the dealer try to get you a better rate than you already have.”
Arranging financing first can help you avoid overpaying for your car. Here’s why it works so well:
1. You can identify credit problems ahead of time
Even people with strong credit sometimes miss paying a bill on time. And this can ding your credit in a hurry. Taking the steps to set up financing before heading to the dealership shows you where you stand.
First, check your credit score. If it’s lower than expected, look to see what’s causing the problem. Because higher credit scores typically mean lower auto loan interest rates, it might be worth delaying your car-buying until you repair your credit and can qualify for a better rate.
If you’re ready to buy, getting preapproved for an auto loan will show you roughly what interest rate you qualify for. Some lenders also let you pre-qualify with only a soft credit inquiry, which doesn’t lower your credit score.
2. You can design loan terms to fit your budget
Applying for a loan ahead of time also shows you how much you can borrow. Using a car loan calculator, you can compare offers and adjust the terms to see how that affects your monthly payment.
Since you know your budget best, you’ll know what monthly payment you can afford. Try different loan lengths and down payments until you find what fits. Doing this in a relaxed setting, rather than when you’re in the hot seat at the dealership, means you’ll make better financial decisions.
3. It shows the car salesperson you’re an informed buyer
Salespeople do their best to size up buyers and their level of knowledge. If a buyer seems inexperienced, the sales staff is trained to exploit this lack of knowledge.
Setting up your financing first shows the car salesperson that you’ve thought through the process. Instead of the dealer leading you in negotiations, you’ll have more control to get the deal you deserve.
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4. It simplifies negotiations while strengthening your position
A question car salespeople are trained to ask early in the process is, “What monthly payment would fit your budget?” If you name a figure, they’ll find a way to get it for you, usually by juggling the numbers in a way that costs you money.
But with a preapproved loan offer you can deflect this question. Just tell them, “I’m a cash buyer — let’s talk about the cost of the car.”
“It helps keep the different car-buying transactions separate,” says Outside Financial President Sonia Steinway. “Buying the car, financing and trade-in are three separate things. If you combine them, chances are that you won’t get the best deal on any of those things.”
5. It forces the dealer to beat your rate
Dealers have access to some of the lowest financing rates available, and when you come in with a preapproved loan offer, they must compete for your business.
In the finance office, the manager will probably ask what rate you’re preapproved for. Instead of tipping your hand, ask the manager to name the best interest rate they can provide. If it’s better than what you’re preapproved for, take the offer. But make sure the dealer doesn't change the terms of the loan you agree to.
Auto lending is growing
The good news for car shoppers is that preapproval is easier than ever before — sometimes just a few clicks away — with new players jumping into the auto loan space all the time. In many cases, you can apply on your phone and get a decision in minutes.
So even if you think you can get a better rate at the dealership, there are plenty of reasons to begin with preapproval from an independent lender.