If you’re ready to buy a vehicle, new or used, and you’re not one of the lucky few who can just write a check for the car, top of your to-do list should be pre-approving the loan you’re getting receive. I need. This is an important way to gain an edge to get a good deal on your purchase.
Related: What credit rating do you need for a car loan?
Getting a pre-approval means you are looking around for the cheapest loan that suits your needs and have that loan in your pocket before You are buying your best deal on the vehicle. These are really two separate transactions, but they can easily be mixed up at a retailer in a way that costs you money overall.
“It’s better to shop around and not just leave yourself at the mercy of the trader,” says Phil Reed, auto columnist for financial advice site NerdWallet.
We discuss how to get pre-approval in this story, but remember that you should go beyond that to actually secure the third-party loan if you ultimately choose to do so. This requires more paperwork from your lender, and specific instructions vary. But the pre-approval at the beginning of the process should help with a roadmap to the finish line.
How to get a pre-approved car loan
Know your credit score
Your credit rating is the key factor in determining the interest rate – the price – you pay on a car loan. Scores range from 300 to 850, and knowing yours will give you an idea of the rate to expect from a lender and warn you of any problems you may have in lending. You can also check your report for errors. We cover here in more detail how to get a loan with dirt credit.
Finding your score is free. There are three major national credit agencies (Equifax, Experian, and TransUnion) used by different lenders to assist in lending decisions, and your results may vary slightly between the three. However, you can order free reports from all three from a single website — typically every 12 months by federal rules, although you can get them as often as weekly through April 2022 due to special pandemic regulations.
A loan — renting someone else’s money — is a product, just like the car you want, and prices vary. Different lenders may offer different interest rates for the same credit score and may differ in other factors such as: B. the required deposit, the total amount they lend for a new vehicle and the maximum months for the repayment. For a used car, expect slightly higher interest rates and tighter limits on loan amounts and duration, as well as possible restrictions on the car’s age, mileage and where you can shop (e.g. private sales might be excluded). A good source for more information about purchasing auto loans is available from the Federal Consumer Financial Protection Bureau.
You can get a general idea of the loans available by contacting lenders by phone, going online, or visiting a lender’s office. Credit unions or banks you already do business with are a good place to start looking for a good interest rate. There are also online lenders that specialize in auto loans. Various personal finance websites offer lists of lenders and current rates – there is one on the Bankrate finance site – but note that the rates advertised may only be available for the best credit scores. According to Equifax, average interest rates on new car loans in the second quarter of 2021 ranged from 2.34% for the best loan (credit score above 781) to 14.59% for the lowest scores (scores of 300 to 500) for new cars. and from 3.66% to 20.58% for used cars.
If you are not sure what to expect with your credit rating, you can first try to “pre-qualify” for a loan with several lenders. Note that prequalification is not the same as get pretested; Such less formal requests do not commit the lender to actually making the loan, nor do they guarantee that you will get the estimated interest rate, but they can serve as a way to get more information about interest rates and decide where to ultimately apply .
Prequalification should involve what is known as a “soft” credit check just to evaluate you as a potential borrower and estimate a loan rate, not a “hard” credit check that may temporarily affect your score slightly. Beware of any lender asking for your social security number, which Reed says would allow for harsh verification.
Apply for the pre-approved loan
To get pre-approval, you actually apply for a loan now, and if you are approved, the lender commits to a loan amount and term at a specified interest rate. While it helps any buyer, this can be even more important if you have patchy credit because you’ve dealt with and prepared for any issues beforehand. After pre-approval, you can purchase your vehicle with the financing completed.
You should seek pre-approval from more than one lender so you can compare actual terms for the best deal. Cars.com offers a free loan calculator that can help you compare loan offers, and you should do all of them quickly, as multiple applications each trigger a kind of “hard” credit check that can affect your score. However, credit agencies typically treat multiple applications for a car loan in a short amount of time—usually around 14 days—as a single application. Then, as with any loan, carefully read the offer you choose to make sure you understand all the details and fees before signing.
Why you should get a pre-approved car loan
Pre-approval might sound like a lot of hassle, but it’s worth it. Here’s why:
It helps you with the budget
Getting pre-approved means you can decide what to spend and what you’re comfortable paying per month in advance with a lot less pressure. You don’t want to make decisions like that in a dealer’s finance and insurance office, where the clock is ticking and it’s hard to keep track of all the details. When you fixate on the monthly payment, merchants don’t tinker with the other details to get the payment they want — which can result in an overly long loan, higher interest costs, or hidden fees.
Planning ahead also allows you to focus not just on the monthly payment but on the total amount you actually paid for the car at the end of the loan. It also gives you time to factor into your calculations the taxes and fees you’ll have to pay when you buy it, as well as the additional monthly cost of insuring the new vehicle. Taking the time to be realistic about what you can really afford could lead you to consider a cheaper vehicle that allows you to borrow less and take out a cheaper (and possibly shorter) loan.
It gives you leverage with the dealer
A pre-approved loan in your pocket turns you into a cash buyer when it comes to negotiating your best price – with the same ability to walk away and check out other dealers. Pre-determined credit also helps you stay on budget when you’re tempted to add more options or upgrade to a higher trim level or a more expensive model.
You will know good credit when you see it
With your pre-approved loan in hand, there is no pressure to accept a dealer-arranged loan – a service for which the interest rate can be increased by 1% or 2% above the rate your loan should be eligible for. You can also determine if a merchant’s offer of credit is a better deal. It might be that the dealership might be able to offer a special lower interest rate on a loan from the automaker’s finance department, for example. If so, you are free to take it; Pre-approval does not oblige you to draw on the third-party loan that you entered into.
You can leave the tax and insurance office with your budget intact
It’s usually unavoidable to end up in the dealership’s finance and incentives office to do the sales paperwork, but you can get to the point when faced with sales pitches for extended warranties and other profitable extras. You can be clear from the start that you have pre-approved credit for a fixed amount and are not paying for add-ons.
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