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A preapproved car loan is a loan that borrowers can get before purchasing a car. Getting preapproval for a loan shows the dealership that you’re ready to buy and can sometimes give you the upper hand in negotiating price and financing. If you are able to get a preapproved car loan, it’s a good idea to do so before going car shopping.
What Does it Mean to Be Preapproved for a Car Loan?
Lenders will sometimes give preapproved car loans to borrowers who qualify for certain loan terms. This is approval for a loan on a conditional basis. The lender will approve an estimated amount of money and an estimated interest rate that the borrower can then take shopping with them.
Why Should I Get a Preapproved Car Loan?
There are several good reasons to get preapproved for a car loan:
- Learn your borrowing limit
- Focus on car shopping
- Gain power in n egotiations
Learn Your Borrowing Limit
Sometimes, it can be hard to know exactly what kind of budget you have for a car. When you go through the preapproval process, NerdWallet.com says that you’ll learn exactly how much money you have to work with as you car shop. Preapproval also helps with budgeting your monthly payments so you can decide exactly how much of your monthly income you can afford to put toward a vehicle. Often, borrowers are approved for more than they actually end up borrowing.
Focus on Car Shopping
When shoppers head straight to the dealership without first figuring out how much they can borrow or what they can afford in a monthly payment, they might find it hard to focus on finding the right vehicle to fit their needs. Without preapproval, you could end up getting your heart set on a car that’s priced above your borrowing limit. The Balance suggests that you understand your budget, get preapproved, and find your ideal car.
Gain Power in Negotiations
If a dealership knows that you need to rely on their own financing options to buy a car, it can be tough to have any control in price negotiations. With preapproval, you can walk into the dealership knowing exactly how much you have to work with and negotiate on your terms. Also, dealership financing can be more expensive than third-party financing, so preapproval helps you avoid taking a bad deal because you need a car, says NerdWallet.com.
How Do I Get Preapproved?
Follow these steps to get preapproved for a car loan:
- Check your credit
- Gather information required
- Get multiple offers
Check Your Credit
In order to decide whether you will be approved for a loan and what your interest will be, lenders look at your credit score and history. You will have a better idea of how the process will go if you know this information first. There are several ways to check your credit score and history using your credit card company or a third party like Credit Karma.
Gather Information Required
Another way to make the process go smoothly is having your information ready. Lending Tree says that lenders will check your credit, but they will also typically ask for the following information:
- Employment information
- Personal identification (driver’s license or military or state ID)
- Social security number
- Income information
- Outstanding debt amounts (student loans, mortgage, etc.)
- Tax documents (previous federal returns)
Get Multiple Offers
Different loans have different features. Interest rates and terms vary from loan to loan, so don’t necessarily stick with the first loan you get preapproved for. You can shop around for car loans just like you shop around for cars. Having a few preapproved loans in hand when you head to the dealership can also help gain you an advantage when negotiating price and might even help you get a better loan offer from the dealership themselves.
A preapproved car loan expires after one or two months, and you don’t have to use a loan you’ve been preapproved for. Once you’ve found your vehicle, use the loan that works best for you and simply let the others expire. You can also contact the lenders to let them know you won’t be using their loans.
What Are the Requirements for Preapproval?
You’ll need to meet a few basic requirements before being approved for a car loan. You may see certain car loan options advertised that look great, but keep in mind that they always say that they are “subject to credit approval.” This means that, first and foremost, you’ll need good credit to get preapproved for a car loan.
Some lenders also require a certain level of income for certain loan amounts. In your loan application, you will likely need to include the following income information:
- Gross monthly salary or income
- Other sources of income including:
- Disability
- Retirement
- Child support
- Alimony
Lenders need this information to determine whether you will be likely to pay back the loan within the time allotted according to your level of income. Lenders want to avoid borrowers becoming delinquent on a loan.
What If I Can’t Get a Preapproved Car Loan?
If you have trouble getting preapproved for a car loan, there are ways to improve your eligibility in the future. If you can’t afford the monthly payments of a certain loan, consider a longer term length.
Boost Your Credit Score
One of the main causes of bad credit is late payments or a poor credit utilization ratio. Set reminders on your phone or set up a calendar to help you remember to make all of your credit card and other loan payments on time. Pay off any outstanding debt you have on credit cards.
According to Experian, your credit utilization ratio is how much available credit you have and how much of it you’re using. Basically, if you have three credit cards with $ 5,000 limits and over $ 4,000 on each one, your credit utilization ratio will be high and will negatively affect your score.
Increase Income and Savings
If you can’t afford the type of car you want now, that’s not to say you won’t be able to in the future. Find a way to supplement your income or start budgeting differently to get some money in savings. The Equal Opportunity Credit Act requires lenders to disclose their reasons for denial. If you don’t understand why you were denied, this will explain and may even reveal a mistake.
Find a Co-signer
A co-signer with good credit can be the difference between approval and rejection. Keep in mind that failure to pay back your loan will negatively affect both of you.
Sources:
https://www.creditkarma.com/auto/i/preapproved-for-car-loan/
https://www.lendingtree.com/auto/pre-approved-car-loan/
https://www.nerdwallet.com/blog/loans/advantages-of-getting-pre-approved-for-a-car-loan/
https://www.thebalance.com/why-preapproved-auto-loans-make-sense-315101
https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/
https://www.nerdwallet.com/article/loans/auto-loans/how-to-get-a-car-loan
