Purchasing a car is a big decision. What vehicle you’re going to get, how much you can afford to spend, and how to get the best
deal are all major considerations when shopping for a car. We know that your goal is to get the best deal and to save the most money while getting a car that meets your needs. Getting an auto loan pre-approval can help you meet this goal.
We’ve created this guide so you can understand what getting pre-approved means, why it might be a good idea for you, and how to go about it. We’ll also give you some information on the documents and factors that a lender will consider when processing your application for pre-approval.
What is Pre-Approval?
Pre-approval, put simply, is applying for a loan before you need it. Essentially, it’s a process that allows the lender to consider your finances and credit history and determine the sort of loan you can theoretically get approved for. This includes the amount of money, rate, and term.
The result of pre-approval is essentially documentation that describes the loan you can get. This allows you to compare loans between lenders, but it will also help you budget and bargain as you head to a dealership.
The Benefits of Auto Loan Pre-Approval
Getting pre-approved for a car loan as part of the shopping process has multiple benefits. It’s a great idea to have some notion of how much money you can spend before you head to the dealership and sit in a new, shiny car.
Develop a budget
Because pre-approval will give you an idea of how much money you can be approved for, it can help you understand what your budget should be.
For example, if you’re dreaming of a brand-new Tesla but can only get approved for $20,000, you probably need to adjust your expectations.
In addition to examining your monthly finances and figuring out how much you can afford to pay, pre-approval for auto loans encourages you to set a realistic budget.
Be a better bargainer
Pre-approval gives you bargaining power! Walking into a dealership already knowing exactly how much you can afford to pay gives you leverage.
For example, you can avoid car salesmen inflating the prices artificially by sticking to your budget.
As soon as you step foot in the dealership, it can be easy to be swayed into upgrading into a car you can’t really afford, especially one with all the bells and whistles. But if you have a prequalification for a car loan and plan to stick to it, you’ll be less tempted to fall victim to the sales tactics of dealerships.
Get the best deal
Putting the thought and effort into shopping for a car loan goes a long way. As with anything, you’ll want to shop around and compare multiple lenders to determine the benefits and drawbacks of each. Prequalification gives you concrete numbers to compare. If you apply for prequalification from different car lenders, this helps you understand the pros and cons of different loans.
If this is your first time purchasing a car, we’ve developed a blog post dedicated to providing financing tips for first-time buyers that will get you closer to the best deal possible.
The Pre-Approval Process
The pre-approval process is pretty straightforward. Essentially, you will provide documentation of your finances and your credit history, which the lender will examine. This is typically done via a “hard inquiry” into your credit, which will temporarily affect your credit score.
To avoid multiple hits to your credit, you should apply for any pre-approvals you are interested in within a short period of time. It can vary, but most of the time, if multiple inquiries are processed within two weeks, they are counted as one.
The documents you need may vary by lender, but in general, you’ll need to provide:
Proof of identity
Proof of residence
Proof of income — like pay stubs
Method of down payment and amount
The lender will look at these documents and issue you a pre-approval, detailing how much money you can receive as a loan and under what conditions.
Qualifying for a Car Loan
If you’re ready to start the process of shopping for a car loan and applying for pre-approval, you may be wondering about the requirements.
Click below to understand what these requirements are and how they affect the potential loans that you can be approved for.