Preapproved auto loans are a great way to save money when buying a car. Simply, they are loans that have already been approved by the potential lender. With a firm understanding of how much you can spend, it enables you to shop around for the best interest rate and loan term.
A preapproved loan also puts you in the driver’s seat when it comes to negotiating the out-the-door price of the car. But before applying for preapproval consider the potential pitfalls of preapproved loans, such as not being guaranteed approval.
What is a preapproved auto loan?
Preapproved auto loans are loans that lenders have already conditionally approved. This means that the lender has already decided to give you the loan. It allows you to walk into the dealership just as a cash buyer would.
The preapproved auto loan will detail the interest rate, auto loan amount and loan terms that the lender is willing to extend to you. This can also be used to negotiate if you want to scope out indirect financing through the dealership as well.
Benefits of a preapproved auto loan
A preapproved auto loan offers you several benefits as a borrower.
You can compare auto loan interest rates
The preapproval process is streamlined and usually processed within 30 minutes. As a result, you can shop around for the best loan rate and compare it with other lenders. Just make sure any full applications are done within two weeks so that they don’t count as multiple inquiries on your credit report.
You may get a better interest rate
Preapproval gives lenders an idea of what other institutions are willing to lend to you. If your credit is strong enough, some lenders may offer you a better interest rate to entice you to choose them.
You’ll have a firm grasp on your monthly payments
Being preapproved means you are already set in terms of the amount you are borrowing, your interest rate and loan term. That means your monthly payment amount is already sorted.
You’ll have the negotiation power of a cash buyer
Because you aren’t relying on the dealership for financing, you can focus on negotiating the out-the-door price, rather than the monthly payment. Just remember not to show your hand too early when it comes to how much you are willing to pay.
Drawbacks of a preapproved auto loan
Preapproved auto loans come with potential pitfalls. Here’s what to watch out for.
- Not guaranteed. A preapproval on an auto loan is not a guarantee of approval. When you go through the preapproval process, you may be required to provide additional information and supporting documents before it’s finalized. And if your credit takes a significant hit between when you are preapproved and when you go to finalize the loan, you may be out of luck.
- Bad credit may disqualify you. If you have bad credit you may not be able to qualify for preapproval. It is still worth shopping around before you head to the dealership, but you may have a harder time finding a lender that is willing to preapprove a loan.
- Matched pairs. A preapproval on an auto loan usually applies to a specific dealer or set of dealerships, which means you likely won’t be able to buy from a private seller.
- No manufacturer financing deals. If you have excellent credit and choose to go with outside financing, you won’t be able to take advantage of a 0 percent financing offer if it’s available. However, just because you are preapproved, doesn’t mean you have to borrow the money.
How to get preapproved for an auto loan
There are a few main steps that you should follow in order to get preapproved for a car loan.
- Determine your budget. The first step is to figure out how much you are willing to spend on a car. Look at your budget, including your monthly income, expenses and other bills.
- Gather your supporting documents. Have your pay stub, employer information and all personal information on hand for when you apply.
- Shop around. Find at least three lenders that offer the amount and term you are looking for. Don’t settle for the first lender you find and check out customer reviews to see if there are any red flags.
- Apply for preapproval. Once you’re ready to apply, you can visit your lenders’ websites or go in person to get preapproved. You will likely have to fill out a few forms. Be prepared to spend at least 15 minutes on each application.
- Go to your local dealership. You can then shop around for a car, knowing exactly how much you can afford.
The bottom line
If you’re in the market for a car, applying for a preapproved loan can save you money and stress. While it can’t guarantee that you’ll get the exact vehicle you want, it will give you a leg up in the competitive car-buying process by allowing you to walk into the dealership knowing exactly how much you can afford.