Financial Tips Friday - Car Loan Preapproval
What are the benefits of car loan preapproval?
Auto loan preapproval makes more sense when you’re certain that you want to apply for an auto loan. Usually, the lender does a hard credit inquiry which will temporarily lower your credit scores. This gives the lender more information to determine your likely loan rate and amount.
Set a realistic car-shopping budget. When you get preapproved for a car loan, the lender will show you how much you can borrow, so you can use this information to set a ceiling for car price. When you find a car that you want, add any taxes and fees to its list price. You can estimate by adding 10% to the list price. Deduct any down payment or trade-in amount, to see if your final figure falls below your preapproved loan amount. If not, you might need to look for a less expensive car. Just know that you aren’t committed to spending the full preapproved loan amount.
Determine monthly car expenses. The best time to know whether a car will fit your budget — with some breathing room — is before you buy the car. Since a preapproved car loan gives you an idea of the monthly payment amount, you can use that and a total car cost calculator to figure in insurance, gas and maintenance. If your total monthly expenses will stretch your budget, you might need a less expensive car or to put off buying one.
Get the best loan rate possible. When you bring preapproved auto loan offers to a car dealership, it enables you to see if the dealership can beat your preapproved rate. Often, dealers have access to financing through “captive lenders” — the auto financing arm for car manufacturers — which can offer lower rates than other lenders. Also, dealers usually work with other lenders to provide auto loans, with a predetermined interest rate for different credit scores. Lenders often have an agreement with dealers that they can mark up your interest rate — as much as 1 or 2 percentage points. Having an auto loan preapproval can help you judge whether the dealer is offering you a fair rate.
Strengthen your negotiating position. With a preapproved car loan, you’re transformed into a “cash buyer” at a car lot, putting you in a stronger negotiating position. When you bring a maximum monthly car payment to the table, you can avoid a common car dealer practice of focusing only on the desired payment amount and extending a loan term to get there (which costs you more in total interest). Instead, you can tell the dealer you want to focus on the vehicle’s out-the-door price. If you have a car to trade, knowing the value of your trade-in will put you in a stronger position at the dealership, too.
Deflect auto dealer upsells. As you’re closing the deal and signing papers in a dealer’s finance and insurance office, you can use your car loan preapproval to deflect add-ons and extended warranty offers that you don’t want. Just say: “I’m preapproved for this amount, and I’m not going to go over it.”
Where to apply for a preapproved car loan
Banks and credit unions are more likely to offer auto loan preapproval, and you can typically apply online, over the phone or in person. If you already have a relationship with a bank or credit union, you might get a better rate by applying there.
Aim to get preapproval from two or three lenders so you can pick the best interest rate, but submit all of your preapproval applications within a 14-day timeframe. If multiple lenders make a hard credit inquiry within a short time, it will count as one inquiry and have less impact on your credit scores. It’s also a good idea to check your credit reports afterward to ensure there aren't any errors.
Originally written by SavvyMoney
