When you believe you’re ready to buy a new or used car, the worst thing you can do is show up to the dealership unprepared. Instead, you should do your homework on specific vehicles that fit within your budget.
But, how do you know what cars are in your budget? The simple answer is through the preapproval process.
Getting an auto loan preapproval will help you understand how much you can realistically afford since a preapproval gives you an idea of how much you can borrow and generally at which terms and rates.
Receiving a preapproval from a lender will not only give you a good idea of how much you can afford, but doing so will put you in the driver’s seat when you show up at the dealership.
Getting preapproved has its advantages, and in this article, we’ll discuss why it may be in your best interest to receive one before heading into the dealership.
The Benefits Of Getting Preapproved For An Auto Loan
Getting preapproved through a bank or credit union has plenty of upsides. One of the main benefits is the ability to skip the financing at the dealership. Generally, banks and credit unions will offer you more favorable terms and rates than you would find at the dealership.
While the upside of better rates is one of the key benefits, it’s far from the only one. Let’s delve into some of the other reasons why you should get preapproved before heading into the dealership.
Preapproval can help you set a realistic budget
Receiving a preapproval for an auto loan can help you understand and create a realistic budget for what you can spend. Through the preapproval process, the lender will provide you with a quote for a specific amount you can borrow. The quote may include the car, title, taxes and additional fees.
Furthermore, you’ll get a general idea of the type of interest rate and loan terms the lender may offer you. From there, you can use a car loan calculator to accurately understand how much you can afford. Your calculation should also include total car expenses such as insurance, gas and maintenance.
It’s important to remember that preapproval is essentially a ballpark range of how much the lender is willing to give you. You don’t have to apply for the maximum amount you were approved for. If you factor in the total car expenses and it turns out to be less than the preapproval amount, it may be advantageous to apply for less.
Avoid dealership markups
While the convenience of dealership financing may be beneficial, there are some drawbacks to be considered as well. If the dealer notices you haven’t shopped around, they may try to mark up your interest rate. Since dealerships work with various lenders throughout the country, it’s hard to pinpoint the average terms and rates. However, you can expect as high as one or two percentage points to your approved rate.
For example, Arizona Central Credit Union currently has rates as low as 3% for 2020 or newer vehicles*. Getting that same deal from a dealership may go as high as 5%. While two percentage points may not seem like a lot, you may be adding hundreds of dollars when you factor in the duration of the loan.
By getting preapproved, you’ll know you received the lowest interest rate you were able to qualify for and determine if the dealership is offering you a good deal.
Narrowing down your search
Preapproval gives you a good idea of how much the lender is willing to provide you with and at what terms and rates. With that information handy, you can start to narrow down the search for vehicles that fit your budget. You’ll feel confident knowing that the extra loan payments won’t create financial distress.
Enhances your negotiation position
Going into the dealership without a preapproval letter puts the car salesman in the driver’s seat of the negotiation. Going in with one essentially turns you into a cash buyer. You already have the background knowledge of your expected monthly payment and how much the total loan might be. This way, you don’t have to play games with the salesman.
How To Get Preapproved For A Car Loan
Now that you know the benefits of getting preapproved for a car loan, let’s delve into the process of obtaining a preapproval letter.
Know your credit standing
One of the most important factors lenders review to determine how much or even if they will approve you for a loan is your credit score. Your credit score provides lenders with a general idea of the likelihood that you’ll repay the loan on time.
Before you apply for an auto loan preapproval, you should check your credit report to ensure all the information is accurate. If you find inaccuracies, you can dispute it with one of the three credit bureaus.
Assemble all necessary information and paperwork
Getting preapproved requires you to present a good amount of information and documents to the lender. When reviewing your application for preapproval, they may ask you about your identity, income, credit history, employment information and any other outstanding debt. Make sure to have the following information readily available if the lender asks for them.
- Social Security number
- Identification (Driver’s license, state ID or military ID should suffice)
- Income
- Employment status
The lender may pull your credit report during the process of reviewing your application. If so, a hard inquiry may hit your credit report. Unfortunately, hard inquiries will drop your credit score, but it won’t be anything too drastic—generally a few points. Additionally, hard inquiries from lenders may stay on your credit file for approximately 14 days at the minimum and 45 days at the maximum.
Once you’ve completed the application process, either online or in person, you may receive a decision within minutes. If the lender needs additional information to complete the process, they’ll contact you.
Get Preapproved With Arizona Central Credit Union
Preapproval is the first and most important step to purchasing a new car. You’ll be able to walk into the dealership with confidence, knowing how much you can spend and what your terms and rates might be.
If you’re ready to get preapproved for an auto loan, Arizona Central Credit Union can help you get started. Contact us today or fill out an auto loan application on our website.
*Rates and model year subject to change. Please visit azcentralcu.org for a listing of current rates.
