Buying a car can be stressful. While paying in cash is often the best option, as it can increase your negotiating power, most people struggle to purchase cars entirely with cash. The majority of people, then, must take out a loan to purchase a new car.
Financing is the solution for the rest of us and there are lots of options to choose from. Financing at the dealership is always an easy choice, since this means one-stop shopping for both the vehicle and the money, but while it can be a good deal, it is not always the best deal. When it comes to financing, the name of the game is research: lots and lots of research. There are many places to receive financing for a new car, and interest rates can vary dramatically, so finding the best deal can take some legwork.
Walking onto a dealer lot with a pre-approval letter shows that you are serious about buying a car and increases your negotiating power; it also makes the shopping process quick and easy. It also lets you know exactly how expensive a vehicle you can afford, which can remove some of the stress from car shopping.
The following are some helpful steps to get pre-approved for your next vehicle.
Part 1 of 1: Get pre-approved for a car loan
Step 1: Acquire a credit report. Pull your credit report from all three of the major credit bureaus and check them for errors.
Look for debts that have already been paid off, debts that do not belong to you, or debts that have been sent to collections in error.
- Tip: If you find any errors contact the credit reporting agency as well as the business reporting the debt.
Errors on your credit report can lead to a higher rate on your loan so make sure everything on your credit report belongs there. Knowing your credit score can also help you determine which rates you will qualify for when applying for a loan.
If your credit score is below 640, you will be considered subprime and may have to shop subprime lenders. Expect your interest rates to be much higher.
- Note: Just because you have a good credit score doesn’t mean you will qualify for the zero percent rates that dealerships often tout in their ads. These rates often require a very high credit score and the majority of people do not qualify. Call the dealership to verify the requirements for their best rates.
Step 2: Collect the paperwork for the loan application. Gather up the paperwork that you will need to apply for a loan. Most lenders will pull your credit report but will also require other documentation.
Be prepared to show proof of income (recent pay stubs), proof of residence (a utility bill), and proof of identity (driver’s license or passport). Requirements vary by lending institution so it is best to verify the required documentation before applying.
Your current insurer should be able to write a policy and provide you with proof of insurance before driving off the lot. Most lenders will ask to see proof of insurance on your current vehicle as well.
- Note: When you decide on a car, a loan company will require proof of insurance. You will be required to carry full coverage on any car that is financed. It is a good idea to get a quote on any car you are considering, so there are no surprises when it comes to the cost of insuring your new ride.
Step 3: Shop for the best rate. It’s time to shop your loan and get the best rate. Ask friends, family and co-workers for banks, loan companies, and credit unions with good rates.
Credit unions and smaller banks often offer better rates, so don’t just check the major banks. Online banks and finance companies can be a good option as well.
It is often best to start with your own bank or other lending institution and then branch out from there. Be sure you are comparing apples to apples in regards to the loan term as well as the details of the loan.
Choose the institution offering the best rate. Make sure you are comfortable with the bank or lending institution and are confident in the loan officer.
Step 4: Complete all paperwork. Fill out all of the required paperwork and wait for your approval. Most major lending institutions should be able to get you approved and send you a pre-approval letter or “blank check” within a few hours or day at the most.
This “blank check” will allow you to buy a car up to the amount that you have been preapproved to spend. Make sure you read all of the fine print attached to the loan and if you have any questions, ask them before you start shopping for a vehicle.
- Warning: Some banks or lending institutions will put restrictions on the specific vehicle you can buy relating to the mileage or age of the vehicle. Check with the bank regarding these restrictions and make sure you understand them before heading to the lot.]
Step 5: Shop for your vehicle. Head to the dealership to shop for your vehicle. Always shop the total price of the vehicle, not the payment.
Make sure the vehicle you choose meets all criteria the lender has applied to the loan.
Once you have decided on the vehicle, inform the dealer of your financing and give them your pre-approval paperwork or “blank check.”
Step 6: Try for a better financing deal. Ask the dealership if they can beat your financing deal. Most car dealers work with a network of lenders, as well as the automaker, to help their customers finance their vehicles.
Financing can be a big moneymaker for dealerships, so make sure you read all of the fine print on their loan documents and make sure you are comparing apples to apples in regards to terms and conditions.
Automakers will often offer financing deals to entice customers. If you qualify, these terms can be an excellent deal with close to zero percent interest rates. See if you qualify and carefully read the terms and conditions before signing.
Step 7: Finalize the deal. Decide on your financing and finalize the deal. Determine whether your pre-approval or the dealers financing is the best deal and complete the purchase, making sure all paperwork is signed.
While the process might seem intimidating, getting pre-approved for a new car is actually a great way to make purchasing a new car a lot easier. You can make sure you know what you are getting into before heading to the car lot, and this will allow you to choose your car with more confidence. Whether you are concerned about getting the best rate or securing the loan the same day, confidence on the lot is the best way to make your car buying experience a good one.
This article originally appeared on YourMechanic.com as How to Get Pre-Approved for a Car Loan and was authored by Mark Vallet.
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