Preapproval might seem like an extra step in the car-buying process (which already has plenty of them). But there are good reasons to take a little extra time to get a preapproved car loan:
- It encourages you to stick to a budget: A preapproval notice will let you know exactly how much you can spend. Keep in mind that you will need to account for taxes and other fees. In other words, if you have been approved for a $30,000 loan, try searching for something that costs a few thousand dollars less.
- It allows you to compare interest rates: There’s no guarantee that you’ll get the best rate by getting preapproved, but at least you’ll have a baseline with which to compare the rates that dealerships offer you. It is likely that the dealer will try to beat the interest rate you already have. You can either tell the dealer you’re not interested or fill out the dealer’s credit application to see what’s offered. Automakers often offer highly subsidized loan interest rates as a means of getting people to finance with them.
- It simplifies negotiation: Once you’re preapproved, you can shop for the car as if you had a check in your pocket. This helps you keep focused on the actual selling price of the car rather than keeping track of the interest rate, down payment, loan term and trade-in. When asking for the price on the car, you can simply ask, “What’s the ‘out-the-door’ price on this car?”
- It reduces the risk of spot delivery complications: “Yo-yo financing” occurs when a dealer allows a consumer with shaky credit to take possession of a vehicle without the dealer-arranged financing being fully sorted out. This can happen when the sale falls on a weekend or late at night, when the bank is closed. A few days later, the buyer gets a call from the dealer saying that the loan was not approved and that he has to bring back the car to either reapply for a loan (usually with higher rates) or, worse, come up with a larger down payment. Buyers can avoid situations like this if they have been preapproved for a loan.
- It saves time and hassle in the finance and insurance office: Car buyers dread the finance and insurance (F&I) office because of the time it takes and the sales pitches the F&I manager makes. Some of the delay is unavoidable. There is a lot of paperwork involved in the purchase of a vehicle. But if you have been preapproved, the time — theoretically — should be cut in half. And when the F&I manager pitches tire warranties and paint protection, you can always use your preapproval limit as an easy way of saying no. Let the manager know that you’ve been approved for a certain amount and you don’t want to spend any more.