How to Get a Pre-Approved Car Loan Today
For the majority of Americans, buying a car with cash is a dream we'll never be able to achieve. Because they're so common, we tend to forget just how expensive cars really are: even if you're buying used (like the vast majority of us), you won't get anything that won't just fall apart on the road as soon as you drive off the lot for under $5,000.
Considering that most Americans don't have $400 to spend on an emergency without dipping into debt, buying a car with cash is simply not an option for the average person. This leaves getting a car loan as really the only viable option for most people, but getting a loan can be tricky and a long process. That's why we're here today to walk you through how you can get pre-approved for a car loan.
Why Get Pre-Approved?
There's myriad advantages to getting pre-approved for a car loan. The first is simple: you don't have to worry about going through all the work of finding a car that suits your needs and then be rudely surprised at the last minute when you don't get the loan you need to buy it. Having this happen can throw off all your plans, cause you to miss a good deal you had lined up, or any of a number of other headaches.
The second reason learning how to get a pre-approved car loan is important is because getting pre-approved for a car loan lets you shop around for the best loan and not have to settle for whatever you can get at the last minute. You'll be able to compare different loans, see which covers the amount you need, and determine which has the best interest rate. Even a 1% difference in interest can have major effects over the span of ten years on your financial health.
The final and most important reason to get pre-approved for a car loan is that it will allow you to negotiate with dealers from a position of power. No longer will they be able to try and confuse you into paying more than you should by hiding the cost under fees and taxes and markups. The dynamic between you and the car dealer is greatly simplified when you don't have to worry about how to afford the car you're looking at, and that's always an advantage.
The Pre-Approval Process
Now that we're clear on the advantages of getting pre-approved, what's the actual process on how to get a pre-approved car loan? There are a couple ways to do it. The simplest is to call up your bank or a local credit union and ask how what their approval process looks like.
Every bank is a little different, but they'll all universally perform a credit check. Your credit score is the single most important factor to whether you'll be successfully pre-approved, and unfortunately, there's very little you can do to affect it in the short term. The better it is, the higher the amount you're be able to borrow, and the lower the interest rate will be. Having a low interest rate is crucial, so keep your fingers crossed that you'll be offered a low one!
After the bank or credit union has checked your credit score, they'll either deny your application or grant it, at which point they'll offer terms like the total amount of the loan, the interest rate on it, and how long you have to pay it back. As we mentioned in the section above, you should seek pre-approval to multiple banks at once so that you have a variety of options to you and don't have to be sidled with a bad offer as your only choice.
What Loan Is Right for You
Once you have the pre-approval process done, it's important to know how to pick between the different offers open to you. There are two key concepts to bear in mind: you shouldn't borrow more than you have to, and the lower the interest rate, the better.
For this reason, you should know more or less how much space you have in your budget to make car payments each month. if you get too large of a loan you'll be stuck paying more each month than you can afford, which will cascade into all kinds of other financial difficulties. It also simply doesn't make sense to borrow more money than the value of the car you plan on buying.
The reason you want a low interest rate is fairly simple: the higher the interest rate, the more extra money you pay to the bank each month. Interest is how the bank makes money off of a loan, but it's also money that you're paying as a tax because you couldn't afford to just buy cash. And no one likes taxes.
One word of caution: while small payments spread over a long period may seem more desirable than paying more each month over a shorter time period, you'll actually end up spending money in total if you pick the latter option. The reason for this is simple, but often hard to grasp. Essentially, since your interest rate doesn't reduce over time (the amount you pay in interest does, but the rate doesn't) you'll end up paying that interest "fee" more times in total.
Stack the Pre-Approval Odds in Your Favor
Hopefully this guide has taught you how to get a pre-approved car loan with minimal headaches. A good or bad car loan can have serious long-term ramifications for your financial situation. That's why it's important to make the right decision today so you won't regret it in the future. Just remember the advantages of getting pre-approved, how the process itself actually plays out, and then how to pick the right car loan for your needs and lifestyle.
Note: The content provided in this article is only for informational purposes, and you should contact your financial advisor about your specific financial situation.