Preapproved auto loans: What they are and why to get one
Key takeaways
- Preapproval can give you a firm idea of how much you can spend and what your monthly payment will be.
- Negotiating out-the-door price and financing can be easier once you have a preapproval offer.
- A preapproval offer doesn’t lock you in, so you can compare other options and choose the best loan for your budget.
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 negotiating a car’s out-the-door price. And while you aren’t guaranteed approval, getting preapproved is a good way to stay on budget and find a good deal.
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.
A preapproval offer will list your interest rate, auto loan amount and loan terms so you can walk into the dealership as a cash buyer with a firm understanding of how much you can spend. Preapproval is helpful if you want to negotiate at the dealership. You will know exactly how much you can spend.
Preapproval is helpful if you want to negotiate at the dealership. You will know exactly how much you can spend. And if you want to be sure you’re getting the best deal, see what the dealership offers in terms of financing. Either they can offer you a better rate or you go with the loan you already have.
Preapproval vs. prequalification
If you are ready to start shopping for a car, preapproval is better than prequalification. It gives you a firm idea of what you qualify for. Unless your finances change drastically, preapproval is essentially an offer that lets you fill in the blanks of the vehicle you want to finance.
This doesn’t mean it’s a guarantee, however. Your lender will still verify your credit score, income and other aspects of your finances, as well as the vehicle itself, before it fully approves you for an auto loan.
Prequalification is the same, but it isn’t as useful when you’re actively in the car-buying process. It’s an estimate based on general information — and it isn’t an offer. You will still need to submit an official application to the lender and undergo a hard credit check to qualify.
Benefits of a preapproved auto loan
A preapproved auto loan has several benefits, including the ability to compare rates and budget for your monthly payment. It is a good choice for most borrowers because you aren’t locked in. If you qualify for a better deal, you can choose it instead.
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 auto 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
Because you can apply for preapproval with multiple lenders at once, you are able to shop rates. This gives you a solid picture of the loans you qualify for. 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 before visiting the dealership means you already know the amount you qualify for, your interest rate and your loan term. That means you’ll have an estimate of your monthly payment before you start shopping and you’ll know exactly 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. In fact, you should always negotiate the total cost of the vehicle before getting into the weeds with dealership financing. A salesperson knows a lot of tricks, so remember not to show your hand too early when it comes to how much you are able to spend.
Drawbacks of a preapproved auto loan
Preapproved auto loans are generally the best choice, but it could limit the dealerships you are able to buy from or bar you from special manufacturer deals.
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 provide additional information and supporting documents before receiving 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
It is possible to get an auto loan with bad credit, but you may have trouble getting preapproved for competitive terms. Still, it’s worth shopping around before heading to the dealership. You will know which lenders may be willing to work with you, and if the pickings are scarce, you may still be able to qualify for dealership financing.
You may be limited to a specific dealer
Some banks and credit unions work with a specific dealer or set of dealerships. This can limit the selection of vehicles you can buy, and it also means you may not be able to buy from a private seller.
Online lenders don’t typically have these restrictions, so it pays to shop around for rates before you start shopping for cars. If you find a much better deal on a used vehicle from a local dealership or private seller, having preapproval from a lender that doesn’t restrict your options is key.
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. Other manufacturer offers, like special lease deals or rebates, also rely on you going with in-house financing.
However, you aren’t obligated to accept a preapproval offer just because you have one. If you qualify for a good deal and it fits your budget, there is nothing stopping you from taking that option instead. Preapproval is about estimating your costs, but you’re never required to stick with the lender.
How to get preapproved for an auto loan
Since most lenders offer preapproval, you can apply online or in-person to see if you qualify.
- Determine your budget: Look at your budget to figure out how much you can afford to spend on a car. Include fuel, insurance, maintenance, inspection, repair and registration costs. As a general rule of thumb, all vehicle expenses should be 20 percent of your monthly income or less.
- Gather your supporting documents: Have your pay stub, employer information and personal information on hand when you apply. This will help avoid hiccups and speed up the application process.
- 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, you can visit your lenders’ websites or go in person to apply. 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. If the dealership is able to beat your preapproval deal, there is nothing stopping you from taking that offer instead.
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 by allowing you to walk into the dealership knowing exactly how much you can afford.
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