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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, getting pre-approved for a car loan can also limit how much you’re able to spend on your new car.
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 get pre-approved for a car loan, it’s only good for a short amount of time, typically 30 days, so you’ll need to find the car you want before your window of opportunity closes. Once you find a car, get final approval from your lender by completing the rest of the application process.
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. You’re letting the dealership know a lender is already prepared to finance your purchase.
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.
Ultimately, it’s up to you and depends on your situation. You might want to get pre-approved for one of the following reasons:
You can apply for an auto loan online, in person or over the phone.
After you get pre-approved for a car loan, most lenders allow you to shop around for around 30 days to find the right car. Some might offer pre-approval for as long as 60 days. Either way, you have a window of time to work with while your pre-approval still stands. If you don’t make a decision during that time frame you can apply for another pre-approval. Ideally your financial situation hasn’t changed much since then so it’s a smooth process.
Once pre-approved, lenders typically give you a cheque that you can use to buy a car at a dealership or with a private party. You aren’t obligated to sign off on the loan if you decide to go with another lender or not make the purchase at all.
You can expect pre-approval turnaround times that are as quick as minutes up to one business day, depending on the lender you’re working with.
With online lenders, you can get pre-approved car loans online by filling in their applications within minutes and receiving a decision almost instantly with a list of loan offers from various lenders. In other cases, a lender may need to contact you for more information before making a decision. Car loans from credit unions are often notorious for having longer turnaround times.
If you’re working with your bank, which already has access to your financial information, including your salary and assets, the process may be more streamlined.
If you’re on the fence about taking the initiative and getting pre-approved for a car loan, there are some benefits worth taking stock of:
Notwithstanding the potential drawbacks, you can get some of the best features and interest rates on the market with a pre-approved car loan.
Here are a few things to keep in mind before you buy your new wheels:
Not necessarily, but it could cause a temporary dip. If you end up getting multiple preapprovals from different lenders with hard credit pulls, your credit score could be affected. However, most of the time lenders are able to pre-qualify and pre-approve potential applications via a “soft pull” on your credit information.
Also, most credit bureaus spot “rate shopping” and can now consider multiple applications for the same type of loan as one. They group these similar credit pulls together especially if they are done within a space of two weeks up to a month, so your score may not decrease significantly.
Yes, you can. While it’s pretty easy to obtain a pre-approval with a great credit score and a down payment in hand, people in bad credit situations can get pre-approved for a car loan too. In fact, there are online lenders that specialize in providing car financing for any type of credit situation, including no credit, poor credit and bankruptcy. You can apply online just as you would if you had good credit and you can receive your decision on a pre-approval within minutes.
Yes, you can be denied a car loan even after you’ve been pre-approved for the financing. The most common reason why this happens is because your financial circumstances have dramatically changed since you applied, such as a loss of income or filing for bankruptcy. Your documentation may not match what you provided to your lender initially for your pre-approval, too.
Another instance where this may happen is if you’re dealing with a car loan scam, commonly called a “yoyo scam”. With these scams, a dealer leads you to believe you’ve been approved for financing and then tells you you’ve been denied. They may follow up with you and tell you to sign a contract with less favourable terms to lock in financing. To avoid this altogether, stick to reputable lenders and do your research on your lender before working with them.
If you’re having trouble getting pre-approved for a car loan, don’t fret. You can turn your situation around by taking on these measures:
There isn’t a striking difference between pre-approvals for new and used cars. The major disparity is the amount you may be asking to borrow because new cars will come with a bigger price tag. In this instance, it may be easier to get pre-approved for a used car compared to a new one.
Keep in mind that your lender is conditionally approving you, giving you a certain amount to buy a car. They still need 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. Your lender doesn’t want to finance a used car that they won’t get their money back on if you end up defaulting on your loan. Basically, even with a pre-approval on hand there are still some hoops for you to jump through!
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.
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.
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.
Since July 2016, Canada has owed on average $2.8 billion per year in car loans, with lenders advancing $4.1 billion in July of 2020. Find out more about the state of car loans in Canada.
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