If you are in the market for a new or used car, you may already be concerned about aggressive salespeople and finance professionals badgering you when you arrive at a dealership to look over their inventory of vehicles. Getting pre-approved for a car loan before you begin shopping for a new vehicle can help you avoid being pressured into making an undesirable purchase and save you money over the life of your auto loan.
Being pre-approved for a car loan means a lending institution has agreed to loan you a certain amount of money you can use to purchase a vehicle. You do not have to use the full amount of the loan to purchase a vehicle, meaning you can buy a car for less than the amount you are approved for, but you cannot exceed the dollar amount your lender has agreed to loan you.
You can use the Internet to research the current interest rates that lending institutions are offering as part of their loan packages in your area. In general, credit unions will have interest rates that are lower than the rates charged by banks by as much as 1 percent.
CNN Money suggests that the monthly costs related to your car, including your loan payments, maintenance expenses and insurance premiums, should equal between 10 percent and 15 percent of your total monthly household budget. With that in mind, it is advisable for you to get quotes from at least two lending institutions to ensure you are getting an affordable loan that has the best terms available in your geographic area.
Lending institutions will typically want to review various pieces of your financial information before they will pre-approve you for a car loan. In general, credit unions, banks and dealerships will require you to provide proof of your income in the form of your latest pay stubs, bank statements and income tax returns to demonstrate you are able to repay your loan. Lenders will also review your credit history to verify that you are responsible with your money and that you regularly pay your bills on time.
Benefits of Being Pre-Approved
If you are successful at getting pre-approved for a car loan, you will enjoy several benefits when you begin shopping for a vehicle. For example, you will be able to take advantage of dealer rebates and discounts because you will not have to give them up to secure a lower interest rate. You will also be spared the burden of coming up with a down payment because you will have already made arrangements to cover the full cost of the car you decide to buy. Finally, you will be protected from spending too much for a vehicle because the amount of your pre-approved loan is the amount you can afford to pay for a car.
- CNN Money: Setting Your Target Car Price
- CNN Money: Shopping for Car Loans and Credit
- CNN Money: Determining Your Car Budget
- Cars Direct: Securing Pre-Approved Auto Loans
- EZAutoFinance.net: How Does a Pre-Approved Auto Loan Work?
- MoneyInstructor.com: Obtain a Pre-Approved Car Loan for Ease and Convenience
- GoBankingRates. "Survey: 69% of Americans Have Less Than $1,000 in Savings." Accessed May 13, 2020.
- Federal Trade Commission. "Financing or Leasing a Car." Accessed May 13, 2020.
- MyCreditUnion.gov. "Personal Loans: Secured vs. Unsecured." Accessed May 13, 2020.
- Small Business Administration. "Collateral and Credit." Accessed May 13, 2020.
- Consumer Financial Protection Bureau. "Auto Loans Key Terms." Accessed May 13, 2020.
- Consumer Financial Protection Bureau. "Comparing Auto Loans." Accessed May 13, 2020.
- Consumer Financial Protection Bureau. "Plan to Shop for Your Auto Loan." Accessed May 13, 2020.
- Consumer Financial Protection Bureau. "Where Can I Get My Credit Score?" Accessed May 13, 2020.
- The North American Securities Administrators Association. "Peer-to-Peer Lending." Accessed May 13, 2020.
Deborah Barlowe began writing professionally in 2010. With experience in earning securities and insurance licenses and having owned a successful business, her articles have focused predominantly on finance and entrepreneurship. Barlowe holds a bachelor’s degree in hotel administration from Cornell University.