Taking on a car loan can feel overwhelming. With so many options available, you may accidentally sign a less-than-perfect contract at the dealership. As a result, you risk getting fewer funds than desired or ending up with higher expenses than anticipated.
The best way to eliminate all the guesswork and secure an easy car purchase is to get preapproved for an auto loan before you start shopping. With preapproval, you can find a lender that works for you, stay ahead of negotiations at the dealership and ensure you’re getting the best possible deal. Fortunately, car loan preapproval isn’t as complicated as it sounds. This article will tell you how to get preapproved for a car loan in three easy steps.
Why getting preapproved is a good idea
Before we get into the preapproval process, let’s consider why it makes sense to engage in one, especially if you don’t know how auto loans work. Getting preapproved for a car loan adds an extra step to the buying process, which is why some people skip it. However, that extra effort can bring many benefits, helping you:
- Determine an acceptable car price range before you start shopping
- Compare interest rates and know your options
- Reduce the risk of scams or bad loans
Does auto loan preapproval mean you’re getting the best possible loan with the lowest interest rates? Not necessarily. But it does help you stay ahead of negotiations and protect yourself from bad deals.
Let’s break these benefits of getting preapproval for a car loan down in detail.
It’ll help you budget properly
Car loan preapproval establishes your budget before you start shopping. With preapproval for an auto loan, you get a notice of all significant loan details, including the total amount you’re entitled to borrow. A clear picture of your budget will allow you to look into the best deals within your price range. All of this will also make the purchasing process easier and faster.
However, note that the preapproved loan amount excludes taxes and fees. Consider adding around 10% of the car’s price to your desired loan amount to account for these costs.
You’ll be prepared to negotiate at the dealership
If you’ve bought a new or used car from a dealership before, you already know the most painful part of the process. Negotiations can take hours. Without proper preparations, you’re likely to spend some time in an office with a sales representative or, worse yet, get a deal that’s not quite to your liking.
Because getting a car loan preapproval helps you understand what’s in your price range, you’ll be more informed when you negotiate with sales representatives.
It also lets you compare between rising auto loan rates and determine what you’ll pay in interest. With all this data on your hands, you can decide whether an offer is or isn’t for you quickly and effortlessly. For instance, if a dealership offers you a loan with higher interest rates than your preapproval, you’ll likely have to keep looking — or try to negotiate lower rates.
How to get preapproved for a car loan
Getting preapproved for a car loan isn’t complicated. You don’t even need great credit — plenty of lenders are ready to offer preapproval to borrowers with average or even bad credit. All you need to do is to pick the best lender for you and prepare all the necessary documentation to speed up the process.
Here are three quick steps to getting preapproved for a car loan.
1. Get your documentation ready
Before filling out an online application with a particular lender, ensure you have all the necessary information and paperwork. Gathering this before applying for a loan will save you significant time and, potentially, money.
Your potential lender may need the following from you to preapprove the car loan:
- Your personal information, such as your address, social security number, driver’s license number and contact details
- Your employment details and income
- A statement on your ideal loan amount and financing terms
If you want to buy a used car and already have it picked out, write down all the details your lender may need, such as the make, model, age and mileage. The lender may ask for this information to calculate the preapproved amount, especially in the case of a trade-in.
Just as with any online process, take precautions when looking for an online lender. Your personal information will only be safe if you work with an established lender, credit union or bank. If you’ve never heard of a particular organization but like its offer, perform thorough research to ensure the legitimacy and reliability of your future partner before starting the loan application.
2. Choose lenders whose minimum requirements you meet
If you search “preapproval for car loan” online, plenty of banks and lenders will pop up. Due to this wide availability of lenders, you may become tempted to pick the first feasible offer. However, you might want to look around and compare your options before deciding on a particular lender.
The best place to get preapproved for a car loan will depend on your credit score and income. Check out each lender’s minimum requirements to see whether you’ll qualify for one of their auto loans.
As a general rule, lenders offer their best interest rates to people with high credit scores. Those with bad credit will be looking at higher interest rates, but the good thing is that paying off an auto loan is a great way to boost your credit score in the long run.
Many credit unions and banks have a minimum credit requirement for auto loans. You can usually find that credit minimum on the lender’s website. Generally, lenders are looking for a credit score that’s subprime or higher (over 500). If you have a credit score over 700, considered good to excellent, you’ll have no problem getting preapproved for a loan with standard interest rates from any lender.
Bear in mind that a hard credit check can affect your credit score. Check whether your potential lenders use hard or soft inquiries to review credit before filling out numerous applications.
The other qualifying factor lenders take into account is your monthly income. As you’ll be making monthly payments on your loan, lenders want to see that you make enough to cover your expenses. Most lenders want to see that you make at least $1,500 per month.
Remember that income is not the same as employment. Some lenders may also accept other sources contributing to your monthly earnings, such as family support, structured settlements, side gigs and investment income.
3. Submit your application and review your loan terms
Once you choose a lender, fill out and submit your online application. You should expect to spend around 15 minutes filling out the form. Depending on the lender, you could get a reply within two minutes, but it might also take a few days.
Although you can accept the loan you get preapproved for immediately, there is no need to rush. Take some time to examine the car loan terms and decide if the deal suits you.
Here are three main things to consider before accepting a preapproved car loan:
When looking for preapproval on a car loan, determine how much the cars on your wishlist cost so that you know how much you’ll need to borrow. Depending on the car you want to get, you may find that the offered loan amount is insufficient.
Your preapproved loan amount is the maximum amount of money you can borrow. It caps your budget and limits your options, so make sure the offer will let you buy your preferred car and cover all taxes and fees.
Required down payment
Pay attention to the minimum down payment required by your lender. Are you able to meet that minimum payment out of pocket? If not, you’ll want to look for a lender with more flexible loan terms.
APR (annual percentage rate)
Your APR is the interest the loan gathers each year plus service fees. In other words, this is the amount you’ll be paying back to the lender on top of what you borrow.
The factors that contribute to your APR include:
- Your credit score. Borrowers with higher credit scores generally get lower interest rates.
- Your income. Stable monthly earnings show lenders that you’ll be able to pay back your loan within the stated amount of time, which can give you a better APR.
- Car’s age. In most cases, new cars have a lower APR than used cars.
- Your down payment. The higher your down payment, the less you need to borrow. Smaller loans come with a lower APR.
Considering all these factors, you should expect an APR between 2% and 15%. Unfortunately, you can’t boost your credit score overnight to get lower interest rates. You can only ensure you state all your monthly earnings and provide other necessary documentation for lenders to consider when making an offer.
One option to improve your loan offer without changing your credit score is to use a cosigner. A cosigner is a trusted person who also signs the loan to support your earnings. Your cosigner is legally obliged to step in and help if you can’t make your monthly payments — that way, the lender knows the loan will be paid and can offer more flexible terms.
Not everyone can find a cosigner, though, as not many people are ready to take over the responsibility of paying off someone else’s debts. If you want to improve your chances of getting the best car loan, you can always apply with multiple lenders and hope one offer will stand out from the rest.
Where to find auto loan financing
Three types of financial institutions offer auto loans: banks, credit unions and online lenders. Before applying for a car loan preapproval, you should explore and compare their offerings to find the lender that suits you best.
Here’s an overview of the three options to help you make an informed decision:
Traditional banks such as Wells Fargo, Chase and Bank of America provide auto loans to qualified borrowers. A traditional bank is a great route if you have a good to great credit score (700 or higher) and want an established lender you can trust.
Getting preapproved for car loan financing through a bank might be challenging if you have poor or low credit, no monthly income and no cosigner. Additionally, traditional banks tend to have relatively high interest rates. Fortunately, traditional banks aren’t your only option.
Credit unions are alternatives to traditional banks. Because they’re usually member-owned and not-for-profit, credit unions often offer lower interest rates than traditional banks. They’re also more likely to offer you a loan even if you don’t have great credit.
However, you must be a member of the credit union to apply for a car loan preapproval, and membership will have its own requirements.
Online lenders are becoming increasingly popular for car loans. These companies offer easy financing for everyone. Their main drawback is that they’re less established than banks or credit unions.
If you have subprime or bad credit, consider an online lender such as Springboard Auto or myAutoloan. These are established and trustworthy sites that cater to borrowers with poor credit. Their auto financing terms might not be ideal (you should expect higher interest rates), but they are legitimate and paying your loan regularly and on time will help boost your credit score.
Moreover, online lenders offer perfectly safe financing options for your auto loan. That said, it’s always good to be cautious. Research your lender, read customer reviews and shop around before you start filling out applications.
Get preapproved and compare your loan offers
Getting preapproved for your auto loan is the best way to set yourself up for success in the car buying process. It allows you to compare loan offers, set your budget and have the upper hand when you head into the dealership for negotiations.
Still, taking out an auto loan is a big decision, and you should perform your due diligence when choosing a lender. Follow our three-step guide on how to get preapproved for a car loan and ensure you get the most reliable and satisfying offer.
- Get pre-approved
- Choose lenders whose requirements you meet
- Submit your application and review your loan terms
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