It helps you plan your car purchase
Getting preapproved can help you eliminate the guesswork of creating a budget for your car. When you’re looking at car prices, use the 20/4/10 rule as a guideline for how much you can afford.
By offering a 20% down payment, choosing a loan term no longer than four years and keeping your total transportation costs under 10% of your total income, you can avoid getting stuck with an auto loan that’s too expensive for your budget.
You can avoid dealer markups
Dealers inflate the interest rate they offer and may charge extra dealer fees to make a profit. With a preapproved car loan, you’ll have an interest rate quote directly from a lender without a middleman marking it up.
You get to act like a cash buyer and avoid upsells
Cash buyers consider the total cost rather than monthly auto loan payments, giving them the upper hand when negotiating a car price. Similarly, when you have a preapproved auto loan, it’s much easier to avoid a sales pitch that could increase your monthly rate.
Where can I get an auto loan preapproval?
Plenty of financial institutions offer car loan preapprovals, including banks, credit unions and online lenders. Here’s what you need to know:
- Banks: National banks offer convenience and provide services beyond auto loans, like savings and checking accounts, credit cards and financial advice. Keeping all of your financial transactions with one institution makes it easy to stay organized and may even qualify you for discounts.
- Credit unions: Your local credit union could be a great first place to check. Credit unions tend to offer lower auto loan rates than banks and many have lenient membership requirements, such as a one-time donation to a nonprofit organization.
- Online lenders: Without the overhead that credit unions and banks face, online lenders can offer competitive rates. You can fill out an online form at LendingTree and receive auto loan offers from up to five lenders.
It doesn’t harm your credit score to apply to multiple lenders any more than it does to apply to one. As long as you submit all your applications within a 14-day window, FICO and VantageScore count multiple inquiries for the same type of loan as one hard credit pull.
What will I need to get an auto loan preapproval?
Application requirements for car loan preapprovals are similar to a regular car loan application. Be prepared to supply the following details:
- Loan information: You’ll need to know how much you want to borrow and for how long. Keep in mind that a long auto loan term may have smaller monthly payments, but higher total interest charges. You’ll also need to provide information about the car, including its age, make, model and mileage.
- Personal information: Lenders will want to know your name, contact details, date of birth and Social Security number. You may have to provide a copy of your ID.
- Residence information: You’ll need to specify your address, length of residency, whether you rent or own and the amount of your monthly rent or mortgage payment. You may also have to provide a utility bill or a copy of your lease or mortgage agreement.
- Income information: Your gross annual income can show lenders whether you can afford the loan. You’ll also need to provide your employer’s name and contact details.
How to buy a car with a preapproved loan
Once you have a preapproved car loan offer, you can take it with you to the dealership, lot or private-party sale. If the dealership doesn’t offer you a loan with better rates, you can move forward with your preapproved loan.
How you’ll use your preapproved loan to buy a car will depend on your lender. LightStream, for instance, will transfer the loan funds directly to you so that you can pay for the car with cash. If you get a loan from Bank of America, you’ll print out your approval letter and present it to the authorized dealer or approved independent dealer, like CarMax.
