Buying a car can be a very expensive, but necessary, purchase, which is why many people choose to take out an auto loan. When you head to the dealer with the intention of finding a car and a car loan, you may have a harder time negotiating and little idea as to whether the final loan terms the dealership offers you are the best you can get.
Given that a car is a very important purchase, you should take the time to research before you head to the dealer. Look at the type of car you want, the average price and your financing options. Getting preapproved for a car loan is a much better choice than waiting until you get to the dealership for financing.
With a preapproved car loan, you can get approval from a bank, credit union or online lender to borrow up to a certain amount before you even go to a car lot and start shopping for your new car, rather than the other way around.
Sometimes your lender may even provide you with a check worth up to the preapproved amount so you can take it to almost any dealership and pay for your car just like you would with a personal check. This gives you tons of flexibility when shopping. Here are the best auto loan rates in 2020.
For an auto loan preapproval, the lender will do a hard pull on your credit. Don’t worry though — this has to happen if you need a car loan. Plus, you have a window of 14 days in which to shop around for an auto loan without multiple hard pulls impacting your credit. It doesn’t hurt your credit score to apply to multiple lenders any more than applying to one as long as you complete all applications within that 14-day window, though some credit-scoring methods may even allow up to a 45-day window.
One way to look at auto loans without affecting your credit is a car loan prequalification. With prequalification, a lender will tell you the rates and terms it offers based on the bare-bones information you share with it — without touching your credit. But be aware that your car loan prequalification is not a hard offer because the lender didn’t do a hard pull of your credit.
Ergo, the final auto loan offer can be vastly different from your prequalification, which doesn’t give you a strong leg to stand on when you go to a dealership. A car loan prequalification might be best only if you plan to buy a car more than a month from when you apply for it.
Less Stress
Before you even step foot in a dealership, you already know what most people stress out about: your down payment and your maximum monthly payment. Because your auto loan preapproval is set, you know pretty well how much you’ll pay and when, as long as you stick at or below your preapproval amount.
Fewer Add-Ons
Dealers like to convince you to buy add-ons, such as extended warranty, GAP insurance, appearance packages and the like. If the salesperson tries to sell you things other than a car — or upgrade you to a more expensive car — you can feel more confident declining the offer because you know how much you can comfortably spend.
A Lower Rate
Getting preapproved is often the best option when you’re trying to finance a car because it can help you get a lower interest rate on your loan. You know the auto loan rate you deserve without the dealership acting as a middleman and upping your APR. Dealerships can and often do raise customers’ APRs, but they’re not likely to convince you to take a higher rate if you have a lower rate elsewhere. In fact, if the dealership wants to finance your car, they’ll need to provide a better rate than your preapproval.
High-interest car loans are like a double-edged sword because while your car is depreciating in value as you use it, you also have to spend several years paying back your loan, which is why it’s so important to secure the lowest rate possible.
Less Time At The Dealer
You can cut to the chase when you know what car you’re looking for and at what price, and you aren’t relying on the dealer to find a loan for you. You spend less time negotiating and less time overall when you have a car preapproval.
More Freedom
When you have a preapproval check from the lender directly, rather than an offer through a dealer, you may be able to go to almost any dealer. This helps you negotiate the price of the car more effectively because you easily can take your business elsewhere if your requirements are not met.
Most auto lenders will be able to help you get preapproved for a car loan. Potential lenders include traditional banks, such as Capital One, Chase and Wells Fargo, as well as your local credit union and online lenders. You can get a car loan preapproval for new or used cars.
The requirements and interest rates will vary depending on the lender so you’ll definitely want to shop around and compare auto loans and terms.
While the requirements to get preapproved for a car loan will vary from lender to lender, there are a few basic requirements you need to consider.
Proof of identity: Generally, you’ll need to provide proof of identity. Most of the time, a driver’s license will suffice. In a few cases, a lender may ask to see your Social Security card or if applicable, a green card or a U.S. visa.
Minimum credit score: Know that you’ll usually need to have at least a fair credit score (580+) to qualify for a car loan, and typically a very good credit score (740-799) to obtain the advertised interest rate the lender is offering. Keep in mind that the promotional interest rates you see on lender’s websites are generally reserved for people with excellent credit.
You can check your credit report for free each year by going to AnnualCreditReport.com. You could also check your credit score with My LendingTree to see where you stand before you try to get a preapproved car loan.
Income requirements: There also may be income requirements. Car loan applications will ask you to state your gross monthly income or salary. If you have other sources of income, such as retirement income, disability, alimony or child support, you will need to disclose that information as well in your application. You may be asked to provide proof of income, like a pay stub, bank statements or a copy of your tax returns, if you’re self-employed.
Once you get preapproved for a car loan, you’ll be able to start shopping for a car that meets your needs and preferences. Your lender will give you a total amount that you can spend along with the interest rate and repayment terms for your loan. Know that the total amount you can spend includes taxes, titles and fees, so look for a vehicle that costs less than the total amount and ask the dealer for the “out-the-door price.”
Your lender may have requirements such as:
It helps to know whether you’re going to buy a used or new car before you start the preapproval process so you can ask your lender about the specifics.
Overall, having a car loan preapproval will simplify the car-buying process and shorten the amount of time you have to spend in the finance office. No one wants to spend an entire day at the dealership, but that’s often what happens if you finance through the dealer and they have to find you a lender and work out all the terms.
If you’re looking to buy a car in the near future, it’s highly recommended that you choose to get preapproved for a car loan. Start by shopping around to find the right lender and asking about their application, terms, interest rate offers and requirements for the usage of the loan.