Buying a car can be quite the ordeal. Between the often-shady salesmen to the long, drawn-out conversation with the dealership finance rep, by the time you’ve finished, half the day is gone. And if you have any kind of errors or problems with your credit, you might go through the whole process only to be turned down.
You can cut out a lot of that by getting preapproved for a car loan, but what does that mean? And how can it help you?
What is Preapproval?
When buying a car, most people head to the car dealer first. The salesman will ask what kind of monthly payment you are looking for, and will negotiate based upon that. The problem with that is you will end up paying far more over the long term; your monthly payment is based upon a number of factors including interest rate, loan term, and the total car loan amount. If you’re negotiating based upon monthly payment amount, you might get a very low monthly payment – but you’ll pay more in interest and fees over a longer loan term.
Preapproval means instead of going straight to the dealer, you’ve gone to a lender first and gotten some important information, such as:
- How much of a loan you can afford?
- How much are the monthly payments going to be at different purchase prices?
- What would your interest rate be?
- Are there any issues with your credit?
With preapproval you can go to the dealer knowing that you have financing available, and already know what the terms of that financing would probably be.
What Are the Benefits to Getting Preapproved?
There are several ways that being preapproved can help you. First and most obviously, you can go to the dealer knowing exactly how much car you can afford, and refuse to get trapped in questions about a monthly payment amount.
The senior consumer advice editor at Edmunds, the auto research site, says even if you have been preapproved and you know your maximum monthly payment, don’t tell the salesman. If you’ve already been preapproved with a lender, you’re a cash buyer – which means the salesman should only be talking about the price of the car, not your monthly payment.
Preapproval also means you can be confident when negotiating price. You’ve already talked to a lender, so you already know what you can afford, and that means you won’t get sucked into a bigger car loan than you can manage. Things that the dealer might try to use to inflate their profit, like a higher interest rate and other fees, are no longer an issue; as a preapproved buyer you can tell them to focus on the price of the car – your monthly payment is none of their business.
How Can You Get Preapproved?
Your best bet when looking for preapproval is to start wherever you currently have your bank accounts. Most financial institutions offer better deals for members and current customers, so check them out first. Many banks and lenders also have online preapprovals, so you can often shop for a lender from your couch. Some only do preapprovals over the phone; make sure you know what your personal bank’s process is.
Keep in mind that for preapproval, the lender will do a hard credit check; that means the inquiry will show up on your credit report for some time. It’ll also lower your score slightly, so it’s a good idea not to do hard credit inquiries too often.
Once your application has been evaluated and accepted you’ll receive an offer statement, such as a letter, outlining what you’re approved for. Make sure you understand it; there may be limitations on the offer such as specific dealers, makes of car, or other caveats. Once you’re clear on what the terms of approval are, it’s time to go shopping.
What if You Don’t Get Approved?
If your application for preapproval gets denied, it’s not the end of the world. Understand first that according to BankRate.com, 18 percent of all current auto loans are to people with “nonprime” credit. In other words, you’re not the only one, and bad credit doesn’t automatically mean you can’t get a loan.
There are ways to give your credit a quick boost, and that might be enough to get you approved. Make sure there are no errors on your credit report as well; the lender can only look at what’s there, and if some of the information is incorrect (such as showing a paid off account as still being active), you could be denied for something that’s not your fault.
If you’ve been denied by a bank or other traditional lender, you could also contact a local credit union. They might offer better auto loan rates, and often lend to nonprime borrowers more often than banks.
Getting preapproved is a good way to go about purchasing a car. Next time you’re in the market for a new car, check with your bank first. It could make your car-buying experience a lot less stressful.