You may get a better interest rate. By applying for an auto loan outside the dealership, you are skipping the middleman. That means you can be sure the rate you are given by the lender is the rate you qualify for. In many states, dealers are allowed to add a small percentage to the lender's loan rate and to keep the difference. This is called a dealer markup, and in many instances it is legal. However, that cost is passed along to the borrower and completely unnecessary. Getting approved for a car loan before you visit the dealership allows you to compare the rates you got elsewhere with the loan rates the dealer is quoting, allowing you to see if you are really getting a deal.
You control how many inquiries are made on your credit score. When you complete a loan application at the dealership, he will inquire with as many lenders as he chooses. While lenders will look at your credit score and ignore other car-loan inquiries within the prior 30 days, the inquiries could result in a hit to your credit score if you try to get a different type of loan shortly thereafter.
The effects are relatively short term, but if you plan to soon apply for a credit card or a home loan, for example, the dip in your credit score could impact the loan's interest rate.
It helps prevent "nightmare" situations. Most dealerships are responsible companies that are not out to scam you, but they are also focused on making as many sales as they can. Every sale directly impacts the bottom line in the form of profits and goes toward manufacturer bonuses and incentives. As a result, dealers will try to make every sale they can, which sometimes means hedging their bets with lenders on which customers will get approved for car loans and at what interest rate.
Occasionally, a lender backs out of its initial car loan or comes back with a higher interest rate after the customer takes delivery of the car. Though it doesn't happen very often, these situations generally take a lot of time and effort to resolve. By getting preapproved for a loan from an outside lender, you'll know where you stand and can feel confident you'll avoid these nightmare situations.
Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.