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Getting preapproved for an auto loan before you walk into a dealership helps put you in the drivers seat during the car-buying process.
A preapproval is conditional approval given to you from a lender with estimated terms such as the amount of money you can borrow, the interest rate and loan term to finance the purchase of a car. This loan quote makes it easier to estimate the total cost of the loan and to create a budget before you start shopping.
A preapproval is a great way to let dealers know youre a buyer whos done your homework. Also, if you get preapproved, you wont necessarily have to rely on dealer financing. This could give you greater negotiating power at the dealership, which can make the car-buying process less stressful.
Getting preapproved for an auto loan can be an easy process if youre prepared with the application documents you need and have healthy credit. Lets explore what you need to do to help get preapproved, how it can benefit you and what you might want to consider if you dont get preapproved.Find a car loan that works for me Compare Loans Now
- The benefits of getting preapproved for a car loan
- How to get preapproved for a car loan
- What to do if you cant get preapproved
The benefits of getting preapproved for a car loan
If you have your heart set on a shiny new car or even a used car you may be tempted to run out to the dealership and start negotiating. But if you arent preapproved for a loan before you start shopping, knowing how much you can borrow beforehand can be difficult to calculate, and you may not know what cars you can afford to buy. Heres how taking the time to get preapproved can help set you up for success.
Get an idea of how much you can borrow
Getting preapproved for an auto loan can help you set realistic expectations about what you can afford to spend. When you receive an auto loan preapproval, the lender gives you a quote for the amount you can borrow and may include the car, title, taxes and additional fees.
Youll also get an idea of what your interest rate and loan terms will be, so you can calculate your monthly car payment and how much car you can afford accordingly. Remember, you dont have to apply for the maximum amount youre preapproved for. And in many cases after you factor in the rest of your expenses it may be a good idea to borrow less if possible.
Ultimately, its up to you to decide how much you can comfortably afford to borrow.
You can focus on the car
If you havent taken the time to run the numbers before you go to the dealership, its easy to get distracted wondering what youll be able to afford and how much your monthly payments will be. But if you already have an idea of how much you can spend beforehand, you can focus on cars that fall within that price range and your budget. This can help you feel confident that your loan payments wont stretch your budget too thin.
Youll have greater negotiating power
If you go to the dealership without an auto loan preapproval and find the car of your dreams, it could be tempting to take whatever financing is available to avoid losing out on the car. But if you have a preapproved loan offer, you may be less likely to feel pressured to get dealership financing that may cost you more than youd like. Also, if you have preapprovals from multiple lenders, you can choose the offer thats best for you, which gives you room to negotiate with the car dealership. If the dealership really wants your business, it may be willing to beat the interest rate your lender is offering.
How to get preapproved for a car loan
Now that you have an idea of why its important to get preapproved, here are some steps you can take that can help.
Check your credit
Lenders will usually review your credit history before issuing a preapproval because it helps predict how likely you are to repay a loan on time. To help ensure there are no surprises during your credit check, review your credit reports before going to the lender to see if all the information is accurate. If you find incorrect information on a credit report, you can dispute the information.
Gather the necessary information
Getting preapproved can require quite a bit of information. Lenders often ask for information about your identity, income, employment information, credit history and other debt payments when reviewing your application for preapproval.
After you review your credit reports, gather the information your lender may request:
- Social Security number
- Drivers license, state ID or military ID
- Employment status
A lender may pull your credit reports as part of the preapproval process, which could generate a hard inquiry on your credit file. Before applying for preapproval, you can check whether the lender is running a hard or soft inquiry.
Hard credit checks from multiple lenders from around 14 days to up to 45 days will usually count as just one inquiry, depending on the credit scoring model used. To minimize the impact to your credit scores as you shop for rates, its a good idea to get all of your preapprovals within that 14- to 45-day window.
When your application is complete, youll typically receive a decision, sometimes in a matter of minutes. In some cases, a lender may need to contact you for more information before it can make a decision.
Get multiple offers
Accepting the first price a dealership offers you on a car may not be recommended, nor is it wise to take the first loan offer you get. Loan features that affect how much youll pay over the life of the loan (such as interest rates and loan terms) vary, so its worth getting preapprovals from at least a few lenders.Find a car loan that works for me Compare Loans Now
Check out what car loans from banks, credit unions and online lenders have to offer and compare each offer carefully. If you skip this part of the process, you wont know if you could have gotten a better deal somewhere else, and you may end up paying more than you need to. By having multiple offers from different lenders, you can compare them to ensure youre getting a rate with terms that fit your budget.
Once youve received preapproval for an auto loan from several lenders, you can take the best offer to the dealer and start shopping. But dont wait too long. Preapprovals are typically valid for 30 to 60 days.
When you find a car you want to buy, you can submit a formal loan application with the dealer that may include a lot of the information you used for the preapproval, including specifics about the car such as the year, make, model, mileage and VIN.
Are there certain types of vehicles that lenders wont finance?
Some lenders restrict the vehicles they will finance. Restrictions are often based on the type of vehicle, how it will be used, the make or number of miles the vehicle has on it.
What to do if you cant get preapproved
It can be tough to hear that you dont qualify for preapproval when youre in the market for a vehicle. Preapproval declines happen for a number of reasons, including a lack of consistent and/or sufficient income or some adverse activity in [a consumers] background, says Mark Lucke, chief sales officer, Sunrise Banks.
Fortunately, there are some things you can do to improve your chances of getting preapproved.
Build your credit
If you have a history of making late payments, maxing out lines of credit and carrying a large debt load, your credit may not be as strong as youd like. But that doesnt mean it cant be improved.
Habits like consistently paying your bills on time, keeping your credit utilization low and minimizing your debt-to-income ratio can help you establish a solid credit history and improve your chances of getting preapproved.
Individualscan always take their chances at a dealership, but if its possible to improve theircreditsituation and theyre serious about it, we advise [them] to work toward improvement and tryfor preapprovalinfour to sixmonths, Lucke says.
What is debt-to-income ratio?
This ratio compares your current monthly debt payments to your monthly income. Lenders use it to help measure your ability to manage payments. The lower the ratio, the better.
Earn more, save more
Even if you have good credit, a lender may not approve you for a loan it doesnt think you can afford to repay. Not sure why you were denied? Ask. Under the Equal Credit Opportunity Act, your lender may send you an adverse action notice if you were denied for preapproval.
If your application for preapproval was denied because of your ability to pay, here are two options. You can save more for a down payment to reduce the amount you need to borrow, or you can boost your income. It may not happen overnight, but if you can get a higher-paying job or side gig, it could improve your ability to repay your loan.
Consider getting a co-signer
If you cant wait to get a car, consider asking someone you know and trust to co-sign the loan with you. A co-signer is someone who agrees to pay back the loan if you cant. But remember, a co-signer is putting their financial health on the line. If you dont make your payments on time or you default on the loan, it wont only impact your credit, it could negatively impact theirs as well.
Getting preapproved for a car loan can help you save money by allowing you to compare loan offers and by improving your negotiating power during the car-buying process. Plus, it gives you an opportunity to review your budget before you start car shopping, so you can keep your finances on track.
If you arent able to get preapproved, taking steps to improve your credit could make it possible down the road.Find a car loan that works for me Compare Loans Now
About the author: Jennifer Brozic is a freelance financial services writer with a bachelors degree in journalism from the University of Maryland and a masters degree in communication management from Towson University. Shes committed Read more.
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