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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 consider the potential pitfalls of preapproved loans, such as not being guaranteed approval if your finances change between applying and fully taking out the loan, before applying with a lender to ensure it makes sense for you.
What is a preapproved auto loan?
Preapproved auto loans are loan products that have already been conditionally approved by the potential lender. This means that the lender has already decided to give you the loan, assuming there are no drastic changes to your financial situation before the loan closes.
The preapproved auto loan offer letter will detail the interest rate, auto loan amount and loan terms that the lender is willing to extend to you. So, you can walk into the dealership just as a cash buyer would with a firm understanding of how much you can spend on a new ride. This can also be used to negotiate if you want to scope out indirect financing through the dealership as well. Just be sure you don’t show your hand too early — wait until after the price of the car is negotiated.
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 most applications are usually processed within 30 minutes. As a result, you can shop around with several lenders and compare offers to find the best loan rate. 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
Preapprovals give 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 than their competitors in an effort to earn your business.
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 you’ll have an estimate of your monthly payment amount before heading to the dealership. You’ll know how much car you can afford.
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.
You’re not guaranteed financing
A preapproval on an auto loan is conditional — there are no guarantees that the lender will fund the loan. Expect to to provide additional information and supporting documents before receiving the final approval. If there are discrepancies in the application and documentation or if your credit rating drops significantly, you could be denied financing.
Your credit score may disqualify you
If you have bad credit, you may have trouble getting preapproved for an auto loan with competitive terms. Still, it’s worth shopping around before heading to the dealership so that you know which lenders may be willing to work with you.
You may be limited to a specific dealer
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. In some instances, this could be very costly, particularly if you find a much better deal on a used vehicle from a private seller.
You’ll miss out on 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
The following steps make it easy to get preapproved for a car loan if you meet the lender’s eligibility criteria:
- 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 to come up with a number, and don’t forget to include fuel, insurance, maintenance, inspection, repair and registration costs.
- Gather your supporting documents. Have your pay stub, employer information and all personal information — like your name, Social Security number, birthday and address — on hand for when you apply. Doing so will help avoid hiccups when it’s time to apply.
- Shop around. Find at least three lenders that offer the loan 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.