Before you go out and begin shopping for a new or used car, consider getting pre approved for a loan. To get approved for a car loan in advance, you will need to submit a preliminary application to a lender. The lender pulls a copy of your credit report to evaluate and may also request other documentation.
After the review, if you qualify the bank informs you of the type of car loan they will be willing to make, how much, the interest rate and other terms.
Obtaining a pre approved car loan is a way to avoid surprises when you go to the car dealership find a vehicle you like and attempt to close the deal.
Even after you receive a pre approved loan, continue to compare and review quotes from other lenders and the dealership to ensure you receive the best financing offer.
Following are four reasons you should get pre approved for a loan before you shop for a car.
1) No commitment necessary
When you obtain a pre approved loan, you are not required to actually get the loan. You benefit from obtaining information and enhance your bargaining power like a cash buyer. Ultimately, you may be able to get a loan with better interest rates or terms from another lender. Remember, you will only get the loan if you meet certain conditions as specified by the lender.
2. Know where you stand
The pre approved loan process will not only let you know how much you can afford but you also avoid getting surprised. Like many borrowers, you may be able to accurately determine that you have the necessary cash flow for a car payment of a certain amount. Nonetheless, you may need to meet other criteria. For example, your credit score plays a major role in the bank’s decision-making.
Completing the pre approved loan process can let you know up front if you have a high enough score to qualify for a loan. If you need to improve you credit score before you begin to shop, it helps to know that before you go out to shop for a car.
3. Better interest rates
One of the main goals of anyone financing a vehicle with a car loan is to save as much money as possible on the costs. To achieve this objective, you’ll need to get the best interest rate possible on the car loan. By getting pre approval and acquiring your own loan, you can probably get a better rate.
Typically, when you finance a car through a dealership, you have a middleman who wants a piece of the financing pie. It may be more convenient to obtain a loan through the dealership or vehicle manufacturer, but you may end up paying a higher interest rate.
4) Develop other options
If you go through the process and find out you are not eligible for a loan or for as much as you like, you can lower your expectations. It also gives you the chance to look into other alternatives upfront before taking the next step. Options may include:
- Reduce the loan you need by making a larger down payment
- Improve your credit score to qualify for the loan and get better rates
- Reduce the loan to debt ratio by paying off other debts or increasing the income, i.e. , apply for the loan with another person
- Get a loan with a longer term
The bank may offer other suggestions on how you can qualify for a pre approved car loan through their institution.
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