Why You Should Get Car Loan Preapproval Before Heading to the Dealership

4 MIN. READ

If you're in the market for a car, you're also likely looking for the right car loan. The loan approval process goes through a lender, and it can only be finalized after you and the dealership agree on a price for the vehicle. But waiting until you get to the dealership to explore your options for financing can leave you frustrated and uncertain about what car you can qualify to purchase. On the other hand, getting a car loan preapproval can give you the upper hand in negotiating the price and terms of your financing.

Here’s why you should take the important step to get preapproved before you go car shopping.

The case for getting preapproved

You may or may not be familiar with the concept of car loan preapproval. Basically, it’s a quick step before you get ready to purchase a vehicle that will help you better understand your own financial position and what you can afford. A preapproval is a firm loan offer from a lender, so you can go into the purchasing phase with a clear idea of what your loan will likely be.

In the preapproval process, you contact a lender in advance and provide information about your financial situation. (More on this below.) The lender reviews your credit and estimates the amount of money that they might be willing to lend you, as well as the interest rate you qualify for.

You can take this information to a dealership when you go for a test drive, which will enable you to:

• Stick to a budget. When you know how much you are approved to borrow, you are less likely to shop for a vehicle that's too expensive or take a bad financing deal to get a more expensive car.
• Negotiate a better price. A car loan preapproval gives you a valuable piece of information to negotiate with a dealership. Most dealership financing is more expensive than a third-party lender. So, coming in with preapproval helps you negotiate on your own terms and avoid getting a bad financing deal.

How to prepare before getting a car loan preapproval

To help the preapproval process go smoothly and enable you to get the best offer possible, follow these tips:

• Check your credit. The most important factor in determining whether you can get approved for a loan and what interest rate you can get is your credit score. You can check your credit score for free at each of the three credit bureaus — Experian, Equifax and TransUnion. The law requires these agencies to provide you a free credit report once a year.
• Get your down payment ready. If you have money to put down on your vehicle, have it ready in your bank account. A down payment can lower your total monthly payments and help you get a better interest rate.
• Calculate your debt-to-income ratio (DTI). Lenders use DTI to determine how much you can borrow. Most lenders only lend if it's 43% or lower. That means your total debt payment each month (for rent/mortgage, student loans, credit cards, etc.) is less than 43% of your total monthly income before taxes. If your DTI is too high, pay down student loans or credit cards before car shopping.

What will you need to get preapproved? 

Most preapprovals are quick and easy, as long as you have a few things available. Lenders usually want to see:

• Proof of income. Typically, this means two recent paychecks from your employer and/or your most recent federal tax returns filed with the IRS
• Proof of residence (utility bill or bank statement in your name)
• Proof of vehicle insurance or the ability to get insurance
• Picture ID (driver’s license, military ID or state ID)
• Social Security number
• Outstanding debts (student loans, other car loans, mortgage, etc.)
• Other monthly expenses, such as rent payment

A few other tips: If you already know what car you want, bring information about the vehicle, including the year, make and model, as well as the asking price at the dealership. Also, trading in a vehicle can lower your total payments. So, if you are trading in, bring information about the vehicle to your car loan preapproval meeting, including any ownership documentation, loan information and registration details.

Get preapproved at Power Financial Credit Union

Getting preapproval for a car loan is a great idea before you buy, and it’s easy to do. Power Financial Credit Union can help you get a personalized offer with flexible terms and low rates. Our convenient and robust digital banking solutions make it easy to manage your car loans online or from our mobile banking app.

Reach out to us to learn more about how we can help you get preapproved!