Buying a car is stressful. No one here will ever say it isn’t. You’ve got a lot to think about. What kind of car do you want? What is the right price range? What if the dealer tries to still me? It can be a lot. One thing you can do to help simplify the whole process is to (if the title didn’t give this away already) get your auto loan preapproved before you head into the dealer. What is auto loan preapproval? Well, that is pretty straight forward.
Auto loan preapproval is when you apply with a bank or credit union for an auto loan and get preapproved for your eventual loan. This allows you to walk into a dealership with a preapproved loan. Why is this important? Why should you do it? Why not just get it all done at the dealer? Well, we shall answer all of these questions and a few others you might be asking in your head!
So, you are ready to buy a car and those questions above are roaming around in your head. Stopping off at a bank or a credit union feels like an unnecessary step when you could bundle the whole experience at the dealer. Well, that may not be the case. It’s actually to your benefit to get preapproval beforehand.
So, I’ve mentioned a few times that you might think it is a better idea to one-stop-shop this whole car buying experience with the dealer. Well, it is simply not true, consummate consumer. Dealers just use bundling the transaction to give them more wiggle with the terms to get you paying more than you ever wanted to.
It works like this: They offer you a high trade-in value for your current car and you think you’ve scored a great deal, but then they tack some terms onto your loan that you don’t fully understand and they make that money up. They can offer you a low price for the car you want to buy but simultaneously give you a low offer for your trade-in.
The “bundle” of a trade-in, car price negotiation, and auto loan terms provide plenty of room to hide things you don’t actually want. When you are reviewing your contract, you will be so done with the whole experience and might just sign anything halfway through. Save yourself the hassle and unbundle that bad boy. It’ll keep things clearer for you in the long run.
So, if unbundling the transaction isn’t enough to convince you, perhaps better loan terms will be. How is this possible? Well, dealers are, more often than not, not the best places when it comes to auto loan terms. Why? Well, dealerships often have markups on their loans. How this all works: Dealerships have a relationship with their preferred loan lenders.
They bring you (the customer) to the lenders. How do they make money off of this? Well, markups, that’s how. They will mark up (get it?) the interest rate so they can make money off of the loan as well. Most lenders have limits that dealers can mark up (2.5%) but others don’t. If you want the best interest rate and terms, you should probably look elsewhere.
This might seem really silly to say but it is true: If you come in, preapproval in hand, a dealer will take you more seriously. It makes it look like you did your research and homework. You read articles like this, you looked at loan options and comparison sites, you know what price range you want to be in – it speaks volumes.
The good news is you’re already on the right track. You are currently reading this article! Research is super important and your road to auto loan preapproval will be littered with good information to gather. Even if you don’t do a ton of research, the dealer will think you did. Fake it ‘til you make it, as they say.
When you get the loan approved, it is for a specific amount. So, the other good thing about auto loan preapproval is it keeps you on track while shopping. This means you can’t go shopping above your price range. This is great news for car shoppers on a budget because dealerships love trying to get buyers with open minds and no research into fantastic cars that are well out their price range.
They can do this by offering long loan terms so the monthly payments look small and approachable, but you still end up paying thousands more than you expected – never mind the thousands more of interest on that long, long loan! Getting preapproval will force you to mentally do the heavy lifting regarding the kinds of cars you want before ever stepping into a dealership. You’ll need to do that research thing we were talking about before and find out what you want and what you can afford.
Knowing what your max is will keep you and the dealer in line. You can’t go falling in love with a car if you never sit in it because it is above your loan max!
So, another potential upshot to getting auto loan preapproval is the dealer beating the loan terms you’ve already been offered. This can happen for multiple reasons. They might have a quota to meet for their lender and by sparing their markup, they’ll get the sale. Whatever their reason, a dealership beating a bank or credit union’s preapproval will only ever benefit you.
Hopefully, this article has done enough to convince you that going out there into the car buying world with auto loan preapproval is a good idea… because it really is. It’s almost a no-lose situation.
Even if the dealer doesn’t beat the preapproval, you are still getting a better deal. If you would like to start this process, why not use NerdWallet’s car loan calculator to figure out what you need to be looking at for your budget? If you have that figured out, use Bankrate’s auto loan comparisons to find a lender. Go on! Get out there and good luck with your car buying!