In some cases, borrowing money to buy a car makes more sense than paying cash, even when you can afford to do the latter. If, for example, you can invest that money in something that will bring a higher return than the amount of interest that you would pay on the car loan, investing that cash and taking the loan makes more sense. Either way, knowing how to get pre-approved for a car loan will help you save money on your purchase and give you more confidence when you go shopping for a car.
Let’s dig into it a bit.
The Benefits of Pre-Approval
As we mentioned above, you can approach the car buying process with more confidence when you know that you already have a lender who is willing to back you. This enables you to negotiate your deal with the assurance that you will qualify. Savvy salespeople can leverage uncertainty to maneuver you into paying more than you should. Another benefit of being pre-approved is that it helps you stay within your budget. You will avoid buying more car than you can comfortably afford if you know that you are approved up to a certain amount.
Pre-Approved vs. Pre-Qualified
Most of us have been the recipients of letters from lenders declaring that we have been pre-qualified for a loan. They look really good until you realize that they do not mean that you can have a loan.
Instead, pre-qualification means that the company is willing to entertain your application for a loan. You will see that those letters will always include the caveat, “on approved credit,” if you read them closely. In other words, they have not taken a good hard look at your credit history; they are just offering you an “opportunity” to apply for a loan so that they can take a look.
The process is largely the same as applying for a loan after finding the car. You will need to get a handle on your budget, determine your credit score, and gather the necessary documentation to prove that you can repay the loan.
Determine Your Budget – Your first step should be to review your household budget to figure out how much you can comfortably afford to pay each month for a car. Be sure to include estimates for fuel, maintenance, registration, and insurance. By the way, you will encounter all of those costs whether you lease or buy a car — although the insurance on a lease will likely be more expensive.
Review Your Credit History – You are entitled to a free copy of each of your credit records from the big three reporting agencies: Experian, Equifax, and TransUnion. Getting to your credit score is a bit trickier, though, and may entail a minor expenditure. Your bank will typically provide it at a nominal cost. However, you will want to review your credit report first and ensure that all of the information it contains is accurate.
Once you are satisfied that it is accurate, you can then request your score to determine where you will fall in terms of the interest rate that you will be asked to pay. Keep in mind that you will be authorizing the lender to check your credit history, which can temporarily lower your score. Be certain that you want to proceed with a deal before doing so.
Submit all of your applications within a few days of each other if you shop around for lenders to see where you can get the best terms and lowest interest rate (and you should). That way, they will all be looked upon as one aggregated request rather than many separate ones — and the effect on your credit score will be smaller.
Gathering Documentation — In most cases, you will need to provide your Social Security number, your driver’s license number, proof of your employment status, and proof of your income. If you have a job, several months of pay stubs will usually suffice. If you are self-employed, you will need to bring your tax documents with you.
And, that is how you get pre-approved for a car loan. Following these guidelines will make the process easier and improve your chances of getting a favorable loan.