Getting a car loan offer before you purchase a vehicle helps you get the best interest rate possible, know your finances and complete the process with confidence.
With a preapproved car loan, you’ll know your monthly payment, loan term and the price of the car you can afford, all before you walk onto the blacktop parking lot. You won’t be nervous sitting at a table in the dealership, waiting to hear whether the bank thinks you can afford the car because you’ll know you’re already approved.
A salesperson might try to guide you to the most expensive models and tell you not to worry —they can give you a longer term and keep your payment low! But you’ll already know that a longer term on a larger loan amount means a whole lot more in interest.
Dealers can inflate auto loan rates to make a profit, just as they can inflate car prices. Dealerships are loan brokers, so they can sell the loan at a higher rate than what the lender charges. Having a firm car loan offer from a lender lets you know what rate you qualify for without a middleman marking it up.
If you have a preapproved auto loan, you can ask the dealer to beat your preapproved APR. Tell them the rate you received from a direct lender and ask if they can do better. Dealers can get a business referral fee from lenders for connecting them with customers. Even if they can’t inflate your APR, dealers want you to take one of the loans they arrange. Dealerships have a wide network of lenders they work with daily and they can likely find a lower rate for you. By doing this, you’re making the dealer sweat and work for you.
A favorite trick of dealerships is to sell vehicles based on monthly payments.
For example, a salesperson might overestimate your payment once you choose a vehicle so that you’ll agree to add-ons when you go to sign the paperwork. If they expect your payment to be around $300, they may tell you that their prediction is $350. Then at the paperwork signing, they can say, “Great news, at a payment of only $360, you get an extended warranty and appearance package! Sign here.” This way, it looks like you’re only paying $10 a month for the extras, but you’re really paying $60 a month, including interest.
If you have a preapproved auto loan, you’ll know what your payment should be, sans upsells.
Plenty of financial institutions offer car loan preapprovals. You could fill out an online form at LendingTree and get up to five auto loan offers at once from lenders.
Your local credit union could be a great first place to check. Credit unions tend to offer lower auto loan rates than banks and every borrower is a member of the organization rather than a customer. Like Consumers Credit Union, some credit unions have lenient membership requirements, such as a one-time, nominal donation to a nonprofit. Others may require that members live in a certain area, have a specific employer or be part of a named trade.
National banks have great name recognition and inspire borrower confidence. They can also offer great convenience. Capital One, for example, offers credit cards, saving and checking accounts, in addition to auto loans. They may make it easy for customers to do all of their financial transactions with one entity. Some banks, however, do not offer auto loans directly to consumers. For example, you can only get a Wells Fargo auto loan through a dealership.
Without the overhead that credit unions and banks face, online lenders can offer competitive rates. If you’re comfortable completing the car loan process entirely online, an auto loan preapproval from an online lender could be the perfect offer to take with you to a dealership.
Application requirements for car loan preapproval are often the same or looser than a regular car loan application.
The lender may ask about the car you want to purchase. You could always change the vehicle by contacting the lender if you change your mind after test driving.
An auto loan preapproval is a firm offer from a lender. When you finalize the loan, your actual APR will be very similar, if not the same, as your preapproval rate. On the other hand, a prequalification is not an official offer, but an estimate of the car loan you may receive. Because a prequalification is not firm, it’s much harder to use it when negotiating at a dealership.
| Auto loan preapproval vs. prequalification | |
| Preapproval | Prequalification |
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