Walking into a dealership with a pre-approved car loan not only helps you know your budget, but it gives you bargaining power to get the best rate. However, it can also limit how much you’re able to spend on your new car.
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Ensure you have all of your personal documents and income information (pay stubs, notice of assessment, valid government-issued photo ID, list of your debts and assets etc.).
Compare loans that you’re eligible for to find the one that works for you.
Contact your bank or the lender you wish to apply with.
Shop around for your next car.
Find a car loan that’s right for you
How pre-approval works for auto loans
Find lenders online, in-person or over the phone who will evaluate your financial situation to determine how much you can borrow. You’ll provide information like your monthly income and your debt, and the lender checks your credit. Lenders usually do a soft pull on your credit for pre-approvals, so it won’t affect your credit score. If you’re pre-approved, it’s only good for a short amount of time, so you’ll need to find the car you want and complete the transaction before your window of opportunity closes.
Why would I want auto loan pre-approval?
If you walk into a dealership with a pre-approved car loan, then you’re prepared to get the best deal and can negotiate the list price and your interest rate with confidence. If your pre-approval is for 11% APR, offer the salesperson 8%. If they come back with 9%, you’ve scored a better deal for yourself. Getting pre-approval doesn’t mean that you have to get a loan that matches the terms of your pre-approval, so if the dealership can give you a lower rate, take it. If you can’t get a lower rate, you can always keep shopping around until you find a better deal.
What is conditional approval for a car loan?
Conditional approval is given when the lender agrees to give you a certain amount to buy a car, assuming that the information on your application regarding the car’s value is true. The lender still has to verify the car’s worth with the dealership, and once the loan officer or underwriter is satisfied that all the information on your application is correct, the terms of the loan can be unconditionally approved. This means that your application will be moved forward to the stage where your funds are settled and your car purchase is finalized with the dealership.
In contrast, pre-approval holds less weight than conditional approval, because pre-approval only indicates the amount that you are theoretically eligible to receive for an auto loan, given your personal and financial information. It does not signal a binding commitment from the lender. You still have to apply for a loan, and the lender could decide to give you a different amount from the one you were pre-approved for or even nothing at all!
Pre-approval indicates to dealerships what lenders are likely to loan you for a car, but conditional approval is a much more powerful bargaining tool, because it indicates that a lender is actually going to give you a certain amount of money as long as a certain condition is met.
Pre-approval vs. pre-qualifying
When it comes to car loans, pre-approval is not the same as pre-qualifying. Pre-approval means that you’re ready to buy the car and essentially already have the money. It usually involves a soft inquiry of your credit history, which will not hurt your credit score. However, when you actually apply for the car loan for which you’ve been pre-approved, a hard credit check will be performed, which will temporarily hurt your credit score.
Pre-qualifying is useful if you just want to get an idea of which rates and terms a lender will give you for a car. It’s essentially about determining your eligibility for a car loan, and involves a soft credit pull that gives you a ballpark estimate of the loan you might get when you apply. It’s helpful when comparing lenders, but it won’t give you leverage for negotiating a price, because you have not yet been approved to receive the money for the car.
Should I get a pre-approved car loan?
Confidence in your financial situation. Because the lender assessed your finances and gave you the green light to purchase a vehicle, you don’t have to stress about securing financing.
Bargaining power. Knowing how much you can spend gives you the upper hand when negotiating a price at the car dealership because you can use the money you conditionally have to convince the dealer to give you a good price.
Receive a lower interest rate. If the pre-approved loan came with an interest rate, you can haggle with the dealership to see if they can offer you a more competitive in-house financing deal — let them make the first offer. If they want your business, they might work to one-up the offer you got from the outside lender.
Fixed interest. A fixed interest rate can help you maintain a budget without having to worry about market fluctuations raising your interest rate.
Short approval time. Auto loan pre-approval usually only lasts for a short window of time.
Limited budget. Because you’ve been pre-approved for a set amount, your car options may be limited if you want a car that’s priced beyond what the lender will give you.
Smaller market. There aren’t as many lenders that offer pre-approved loans compared to lenders offering standard car loans.
Secured loan. If your credit is poor, your loan option may be based on the condition that your car will be used as collateral for the loan. In this case, your car will be repossessed if you can’t make your payments.
More features to consider
Notwithstanding the potential drawbacks, you can get some of the best features and interest rates on the market with a pre-approved car loan.
Choice of fixed or variable interest rates. Keep your repayments the same each months or take advantage of the flexibility of a variable rate loan.
Up to seven-year loan terms. Longer loan terms can help make the regular payments more affordable. Fixed rate loans may only come with maximum loan terms of up to five years. Keep in mind that longer terms, though, lead to greater amounts of interest paid over time.
Weekly, twice a week and monthly payment options. This differs among lenders, but you’ll usually have the choice of when you want to make your loan payments.
Extra payments. Some pre-approved car loans allow borrowers to make additional repayments without penalty.
5 tips to get pre-approved on a car loan
Here are a few things to keep in mind before you buy your new wheels:
Research your car. The make. The model. The year. The color. Also take gas efficiency costs into consideration.
Check your financial standing. Car loans are a serious financial commitment. Be sure that a loan is something that you can realistically fit into your budget.
Test drive your car. Taking the car for a test drive helps you determine if there are any issues.
Take the car to a mechanic. Even if it costs a little extra, having a mechanic eyeball your car for any problems under the hood could save you a boatload of money down the line.
Shop around. Your next car may be available from several dealers — it would be good to shop around and find out which dealership is offering the most competitive deal for your preferred vehicle.
When you’re searching for a pre-approved car loan, keep in mind that not all loans offer pre-approval as an option. If you want the security of knowing what your car budget is and what you can approach a dealer with in order to negotiate, it’s important to know exactly which lenders will pre-determine this information for you.
Frequently asked questions
It depends on who you bank with and what lenders you reach out to. To get a loan, you have to be at least 18 years old and a permanent resident or Canadian citizen. You also have to have a steady, paying job and be able to afford your loan repayments.
Pre-approved car loans can be used at dealerships, in private sales and at auctions.
You should choose a car based on the features you want and then pick one that’s in your budget. There are benefits and drawbacks to both new and used car purchases. For instance, used cars can be a bargain but can come with unknown mechanical problems, while new cars come with a factory warranty but depreciate very quickly after you buy them.
When buying a new or used car with a loan, you have to pay for any costs or fees surrounding the loan, licensing and registration and insurance so that you can legally drive.
Matt Corke is Finder's head of publishing for rest of world and New Zealand. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time, he has survived the dot-com crash and countless Google algorithm updates.
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