Getting a new car requires that you make smart decisions about how to pay for your new vehicle. Fortunately, there’s a way to get the best financing set up so that you can focus on choosing a safe and reliable ride: If you’re going to borrow, get pre-approved for an auto loan before you start shopping for cars.
Why Get Pre-Approved?
When you get pre-approved for an auto loan, you benefit in several ways.
- Learn what lenders are willing to offer
- Gain negotiating power
- Avoid last-minute surprises (which often come after you’ve spent time and energy, and possibly made a decision that you don’t want to change)
- Keep your options open—there’s no obligation to use a lender that pre-approves you—while getting valuable information
Getting pre-approved uncovers important details.
How Much Can You Afford?
You don’t want to fall in love with an auto that will ruin your finances. Review the numbers when you’re at home, relaxed, and able to take your time reviewing your finances. Alternatively, if you’re going to splurge, you can do so with confidence.
How Much Are Monthly Payments at Various Purchase Prices?
Don’t let the sales staff figure this out for you—they can “massage” the numbers to make a purchase fit within your monthly budget. Unfortunately, you might pay more than you should, especially when factoring interest costs and other charges.
What Interest Rates Are Available?
By speaking with lenders early in the process, you can have one or two offers in hand before you walk into a dealership. That information is useful if you need to negotiate, and it can help you decide whether or not you’re receiving competitive offers.
Shop Like a Cash Buyer
When you get pre-approved, you can shop for a vehicle based on the purchase price, which is the most important factor. Dealers sometimes try to shift your focus toward the monthly payment, but that’s easy to manipulate. For example, if you stretch out your payments over a longer period, your monthly payment decreases. That might seem appealing, but you’ll end up spending more on your car (and taking risk) in the process. To get the best deal, you need to do two things:
- Pay the right price for the car, and
- Pay as little interest as possible (assuming you’re not paying cash)
Understand the Costs
Your expenses are transparent when you’re in charge of financing. There’s no fuzzy math where you have to evaluate optional features based on a monthly payment for the next five or seven years. You either pay more for the car, or you don’t. You’re in control.
If you’ve gone through the pre-approval process, you can buy whenever you’re ready. Other buyers may find out about significant problems in their credit reports at the last minute—but you will have already cleared up any errors in your report. You can do your shopping and buying all on the same day, if you want.
Negotiate on Price
While there are plenty of good car dealerships out there, the bad ones cause some consumers to be skeptical of salespeople and the industry.
You never know who you’re going to deal with, so having a pre-approval letter improves your chances of negotiating on what matters: your new auto’s price.
Dealers sometimes try to focus your attention on the monthly payment (is it a payment you can stomach?). That way, they have room to adjust other parts of the deal. Your monthly payment is calculated using several inputs:
Once you agree to a payment, they can try to squeeze profits out by manipulating those three factors.
When you go in with a pre-approved auto loan, the monthly payment is none of the dealer’s business, so there are no games to play. You and your lender have already agreed to the financing, and the dealer just needs to decide if your offer to buy is high enough for them to let go of the car.
Going in without an offer means you’ll have to deal with other aspects. You might believe that you qualify for 0% financing (or whatever the day’s teaser is) when you actually don’t. You may spend hours looking at vehicles and negotiating with dealers, only to find out that you’re in above your head.
The auto-buying process can be grueling, so focus your attention and energy on getting a good purchase price.
The Back Office
What about the logistics of funding your purchase? When you have pre-approval for your loan, you can focus on finding the automobile that’s right for you. The dealer works directly with your lender to complete the funding. You’re not a banker, and you don’t need to be. Dealers get paid by banks, credit unions, and other lenders all the time.
Sometimes it’s wise to keep your financing details to yourself for a while. Let the dealer know that you will not need financing, and keep negotiations focused on price. If you let them know that you’ve got a loan lined up elsewhere, they may try to shift the conversation to other factors. You can entertain their offers later, but settle on a price first.
Don’t Ignore Dealer Offers
Auto dealers may get a bad rap. Some of them are perfectly reasonable, and they just want to sell you the right car at a fair price. Don’t ignore financing offers and manufacturer incentives just because they come through the dealer. It’s possible that the dealer can do better than your bank or credit union, so you should at least listen to the offer. Make sure to read all the fine print before moving forward. Don’t believe anything until you see it in writing.
If you get a great offer from the dealer, but you want to refinance after the deal is done, you can do so at any time.