Maximize Your Savings: The Benefits of Getting Preapproved for a Car Loan
When it comes to purchasing a vehicle, car dealers often make it convenient by arranging financing for you. However, if you want to maximize your savings and gain more leverage at the dealership, getting preapproved for a car loan before you go is a smart move. In this blog, we’ll explore the benefits of getting preapproved for a car loan, how it can impact your credit, and the steps you can take to get preapproved.
Can You Get Preapproved for a Car Loan?
Yes, you can get preapproved for a car loan, and there are two primary ways to do so: through a direct loan or dealer-arranged financing.
With a direct loan, you apply directly with an auto lender, usually before you even visit the dealership. You’ll provide the lender with information about yourself and the vehicle you want to buy, and they’ll offer firm loan terms you’re likely to be approved for. In some cases, the lender may even send you a check to take to the dealership.
Some lenders also offer prequalification, which gives you conditional approval with estimated terms, such as the amount you’re eligible to borrow, a rate quote, and repayment terms. This can be a helpful step before submitting an official application.
On the other hand, dealer-arranged financing involves the dealer sending out a credit application to multiple potential lenders on your behalf. While this can help you save money, the dealer may give you a slightly higher interest rate, taking a cut as compensation for finding you a lender.
Benefits of Getting Preapproved for a Car Loan
There are several reasons to get preapproved for a car loan, even if you decide not to officially apply with a direct lender:
You’ll Know Your Budget
When you submit a preapproval application, the lender will use the information to tell you how much you can afford to borrow. Additionally, you can use this information, along with the interest rate and repayment term options, to calculate a ballpark monthly payment. This process can help you ensure that the loan payment fits within your budget.
You Can Shop Around
If you apply with at least a few lenders, you can compare interest rates and other terms to determine which one can offer you the best deal on the loan.
You Can Focus on the Vehicle
Since you’ve taken the time to assess the financial aspect of the process before heading to the dealership, you’ll be able to focus on which car you want instead of worrying about what you can afford.
You May Have More Negotiating Power
When relying on dealer-arranged financing, you may feel pressured to buy a car outside of your budget. In particular, dealers may try to negotiate based on the monthly payment instead of the total amount—longer repayment terms yield lower payments but result in higher interest charges. The dealer may even try to beat the terms of your preapproval offer. Having preapproval before heading to the dealer also gives you a hard price cap, which could give you additional leverage.
Does Getting Preapproved for a Car Loan Hurt Your Credit?
In most cases, an auto loan preapproval has the potential to impact your credit. For example, if you go through the preapproval process with the lender and submit all of your information and documentation, the application will typically result in a hard inquiry, which can temporarily impact your credit score.
That said, if a lender sends you a preapproval offer in the mail, it made its decision based on a soft credit check, which won’t impact your credit. Additionally, the terms are typically conditional, meaning you’ll need to apply and provide more details to get concrete terms.
Remember, too, that preapproval is not the same as prequalification. If a lender offers a prequalification tool, it typically requires very little personal information, and it doesn’t impact your credit score.
How to Get Preapproved for a Car Loan
The process for getting preapproved for an auto loan can vary slightly from lender to lender. In general, though, here are some steps you can take:
Check Your Credit
Before you even research lenders, check your credit score to get an idea of what you can expect. The best auto loan rates are typically reserved for borrowers with a credit score of 720 or higher.
Consider Prequalifying for an Auto Loan
If you want to gauge your options without the commitment of a hard inquiry, prequalification allows you to get rate quotes and an estimate of what you can borrow. Prequalification isn’t always as accurate as preapproval, however.
Apply with at Least a Few Lenders
It’s often a good idea to submit an application to at least a few lenders, so you can compare the offers. While that means one hard inquiry for each application, rate-shopping within a short period—45 days for newer FICO® Score models but only 14 days for older versions—will result in those inquiries being combined into one for credit-scoring purposes.
Pick the Best Offer and Head to the Dealership
Once you’ve received all of your preapproval offers, pick the one that works best for you and take it to the dealership to buy your car.
Monitor Your Credit to Maximize Savings on Auto and Other Loans
Leading up to your vehicle purchase, it’s important to maintain good credit habits to improve your odds of getting a low interest rate. But even after you get approved, it’s important to stay on top of your credit to maintain your progress.
With Experian’s free credit monitoring service, you’ll get access to your Experian credit report and FICO® Score, making it easy to understand how your actions impact your credit. You’ll also get real-time alerts when changes are made to your credit report, which can help you spot identity theft and other potential issues that can affect the health of your credit profile.
At O1ne Mortgage, we understand the importance of securing the best financing options for your vehicle purchase. Our team of experts is here to help you navigate the preapproval process and find the best loan terms to fit your needs. Call us today at 213-732-3074 for any mortgage service needs, and let us help you drive away in your dream car with confidence.
