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How to Get Preapproved for a Car Loan — and Why You Should

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If you’re ready to buy a new or used vehicle and you’re not one of the fortunate few who can just write a check for the car, at the top of your to-do list should be getting preapproved for the loan you’ll need. It’s a key way to give yourself an edge toward getting a good deal on your purchase.

Related: What Credit Score Do You Need for a Car Loan?

Getting preapproved means that you shop around for the lowest-cost loan that meets your needs and have that loan in your pocket before you shop for your best deal on the vehicle. Those really are two separate transactions, but they can easily get mixed together at a dealer in ways that cost you money overall.

“It’s better to shop around and not just throw yourself on the mercy of the dealer,” says Phil Reed, automotive columnist at financial advice site NerdWallet.

We discuss how to get preapproval in this story, but bear in mind you’ll want to move beyond that to actually secure the third-party loan if you end up choosing it. That involves more paperwork with your lender, and specific instructions vary. But preapproval at the beginning of the process should help in a roadmap to the finish line.

How to Get a Preapproved Car Loan

Know Your Credit Score

Your credit rating is the key factor in the interest rate — the price — you’ll pay for a car loan. Scores range from 300 to 850, and knowing yours gives you an idea of the rate you should expect from a lender as well as alert you to any problems you might have getting a loan. It also will allow you to check your report for errors. We cover in more detail here how to get a loan with spotty credit.

Finding out your score is free. There are three major national credit agencies (Equifax, Experian and TransUnion) used by various lenders to aid loan decisions, and your scores might vary slightly among the three. But you can order free reports from all three from a single site — usually every 12 months under federal rules, though special pandemic rules will let you get them as often as weekly through April 2022.

Shop Around

A loan — renting someone else’s money — is a product just like the car you want, and prices vary. Different lenders might quote different interest rates for the same credit score and might differ on other factors, such as down payment required, total amount they will lend on a new vehicle and maximum months to pay it back. For a used car, expect slightly higher rates and tighter limits on loan amounts and length, as well as possible limits on the car’s age and mileage and where you can shop (private-party sales might be excluded, for example). A good source of more information on car-loan shopping is available from the federal Consumer Financial Protection Bureau.

You can get a general idea of the loans available by contacting lenders by phone, going online or visiting a lender’s office. Credit unions or banks where you already do business are a good place to start looking for a good rate. There also are online lenders specializing in auto loans. Various personal finance websites offer lists of lenders and current rates — there’s one at finance site Bankrate — but beware that the advertised rates might be available only for the top credit scores. According to Equifax, average rates on new-car loans in the second quarter of 2021 ranged from 2.34% for the best credit (credit scores above 781) up to 14.59% for the lowest scores (scores from 300 to 500) for new cars, and from 3.66% to 20.58% for used cars.

Consider Prequalifying

If you’re unsure about what to expect with your credit rating, you can first seek to “prequalify” for a loan with several lenders. Note that prequalifying is not the same as getting preapproved; such less formal inquiries do not commit the lender to actually make the loan, nor do they guarantee you’ll get the estimated rate quoted, but they can serve as a way to get more information about rates and to help decide where to eventually apply.

Getting prequalified should involve what’s known as a “soft” credit check just to evaluate you as a potential borrower and estimate a loan rate, not a “hard” credit check, which can temporarily ding your score slightly. Beware of any lender asking for your Social Security number, which would allow a hard check, according to Reed.

Apply for the Preapproved Loan

To get preapproval, you now actually apply for a loan and, if you’re approved, the lender commits to a loan amount and length at a given interest rate. While it helps any buyer, this can be even more important if you have spotty credit because you’ll have dealt in advance with any issues and gotten yourself set. Once preapproved, you’re ready to shop for your vehicle with financing in hand.

You should apply to more than one lender for preapproval so you can compare actual terms for the best deal. Cars.com offers a free loan calculator that can help you compare the loan offers, and you should do them all quickly because multiple applications each will trigger the kind of “hard” credit check that can affect your rating. Credit agencies, however, usually will treat multiple applications for a car loan in a short time — generally about 14 days — as a single application. Then, as with any loan, carefully read the offer you choose to be sure you understand all the details and fees before you sign.

Why You Should Get a Preapproved Car Loan

Preapproval might sound like a lot of trouble, but it’s worth it. Here’s why:

It Helps You Budget

Getting preapproved lets you decide in advance with much less pressure what you want to spend and what you can comfortably pay per month. You do not want to make such decisions in a dealer’s Finance and Insurance office, where the clock is ticking and it’s hard to keep track of all the details. If you fixate on the monthly payment, dealers carn tinker with the other details to get the payment you want – which could leave you with an excessively long loan, higher interest costs or hidden fees.

Planning ahead also lets you focus not just on the monthly payment but on the total you’ll actually have paid for the car by the end of the loan. It also gives you time to include in your calculations the taxes and fees you’ll have to pay as part of the purchase, as well as the additional monthly cost to insure the new vehicle. The time to be realistic about what you really can afford might prompt you to consider a cheaper vehicle that will let you borrow less and take on a lower-cost (and possibly shorter) loan.

It Gives You Leverage at the Dealer

A preapproved loan in your pocket makes you like a cash buyer when it comes to negotiating your best price — with the same ability to walk away and shop around among other dealers. Having a loan set in advance also helps you stick to your budget if you’re tempted to add more options or move up to a higher trim level or more expensive model.

You’ll Know a Good Loan When You See It

With your preapproved loan in hand, you’ll be under no pressure to accept a dealer-arranged loan — a service for which the rate can be marked up 1% or 2% above the rate for which your credit should qualify. You can also tell if any dealer loan offer is a better deal. It might be — the dealer might be able to offer, for example, a lower promotional rate on a loan from the automaker’s finance arm. If so, you’re free to take it; being preapproved does not obligate you to take the third-party loan you came in with.

You Can Leave the Finance and Insurance Office With Your Budget Intact

Ending up in the dealer’s finance and incentives office to complete the sales paperwork is usually unavoidable, but you can cut to the chase if presented with sales pitches for extended warranties and other profitable extras. You can be clear from the start that you have a preapproved loan for a fixed amount and won’t pay for add-ons.

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