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Car Loan Pre-Approval Guide

Learn about car loan pre-approval and gain buyer confidence with Savvy.
Published on December 14th, 2020
  Written by 
Adrian Edlington
Adrian Edlington is PR & Communications Manager at Savvy. With a keen interest in personal finance, car loans, the mortgage industry, cost of living pressures, electric vehicles and renewable technology, Adrian's research includes conducting primary data surveys and analysis of up-to-the-minute secondary Australian data sources. His work on behalf of Savvy has been featured on ABC.net.au The Conversation, the Sydney Morning Herald, AFR, News.com.au, The Age, Herald Sun, Adelaide Now, SBS On The Money, 7News, Car Expert, Which Car, Drive.com.au and more. In his spare time, Adrian enjoys mountain biking and business podcasts.
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   Reviewed by 
Bill Tsouvalas

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Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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When buying a car, understanding your financing options is crucial for a smooth and stress-free experience. One approach is to get car loan pre-approval – but what does this mean? In this comprehensive guide, we delve into what pre-approval entails and how it can benefit different types of buyers.

What is car loan pre-approval?

Car loan pre-approval, also known as conditional car loan approval, is preliminary approval from a lender to borrow a set amount of money to purchase a vehicle. The money is not released to you immediately; instead, you must buy a car for the transfer to occur. In effect, your loan is kept on standby until you find the car that suits your needs. Keep in mind that the amount is not final nor is it legally binding. 

Car loan pre-approval sets a price ceiling that provides you with a clear budget to work with and can help you negotiate better prices. It also allows you to shop for a vehicle with confidence, knowing you have financing secured in advance.

Once you have pre-approval from a lender, you typically have the flexibility to choose where you want to buy your car. The funds may be used for purchasing a vehicle from various sources, including dealerships, private sellers and auctions. However, it's essential to confirm this with your lender, as they may have restrictions or conditions regarding the use of the funds.

How does car loan pre-approval work?

Car loan pre-approval works in much the same way as any type of personal finance approval. Here’s a breakdown of the process:

  1. Application: you submit an application for pre-approval to a lender, either online or in-person. The application requires information about your income, employment status, credit history and the amount you would ideally borrow for the car purchase.
  2. Credit check: the lender conducts a credit check to assess your creditworthiness. They review your credit report, credit score and other financial factors to determine your eligibility for a car loan pre-approval.
  3. Evaluation: based on the information provided and the results of the credit check, the lender evaluates your financial situation to determine the maximum loan amount they're willing to offer you. This pre-approved loan amount is typically valid for a specific period, such as 30 to 90 days.
  4. Pre-approval offer: if you meet the lender's criteria, they provide you with a pre-approval offer outlining the terms of the loan. This includes details such as the maximum loan amount, interest rate, repayment term and any other conditions or requirements.

What should I do before applying for pre-approval?

Before applying for a pre-approval car loan, you should:

  • Examine your credit history: find out your creditworthiness by getting a copy of your credit report from one of the major credit reporting bodies (Equifax, illion and Experian in Australia). Look for and address any errors, and work on improving your credit score.
  • Get your documents together: gather the necessary documentation, such as proof of income, proof of residence, identification and details of any existing assets or liabilities. Having these documents ready will help streamline the pre-approval process.
  • Consider all the costs: assess your finances to determine how much you can afford to borrow. Also consider other associated costs such car insurance, maintenance and potential registration fees. This will give you a realistic picture of your car ownership expenses.
  • Shortlist potential cars: narrow down your choices and decide on the type of car you want to purchase. Consider factors such as make, model, age, mileage and features to ensure it fits within your budget and meets your needs.

Can I get pre-approved for a car loan with a balloon payment?

You can generally get pre-approved for a car loan with a balloon payment. A balloon payment is a lump sum payment that is due at the end of the loan term. It is typically larger than the regular monthly payments – often between 20% and 40% of your loan amount – and is used to reduce the monthly repayment amounts during the loan term.

In this scenario, the lender assesses your financial situation and creditworthiness to determine the maximum loan amount they are willing to offer you, taking into account the balloon payment. If you are approved, you can purchase the car using the car loan and the balloon payment will become due at the end of the loan term.

How can a finance broker help with securing pre-approval?

A finance broker can be a valuable asset in securing pre-approval, offering expert guidance and personalised assistance throughout the application process.

When you use a broker to obtain car loan pre-approval, you submit your application for pre-approval to them rather than directly to the lender. The broker acts as an intermediary between you and multiple lenders, giving you access to a wider range of loan options.

The broker will use their in-depth knowledge of the lending market to assess your situation to determine which lenders and loan products are most suitable for you. They may also provide guidance and advice on the types of loans that align with your requirements, helping you choose the option that best fits your needs.

Once you've selected a pre-approval offer, the broker submits your application to the chosen lender on your behalf. They handle all communication and paperwork throughout the process, streamlining the process and ensuring a smooth and efficient submission. They may also negotiate with lenders to secure better terms or interest rates for your pre-approved car loan.

I’ve secured pre-approval – what are the next steps?

After being pre-approved for your car loan, the next steps typically involve finalising the loan application and completing the purchase process. Here’s what you need to do:

  • Choose your vehicle: you can start shopping for your car, ensuring it fits within your budget.
  • Provide documentation: once you've agreed on the purchase price, you’ll need to provide your documentation to the lender to finalise the loan.
  • Complete the loan application: submit the loan application provided by the lender.
  • Review and sign the loan documents: the lender will provide you with the loan documents to review and sign. Take the time to read through all the terms and conditions carefully.
  • Close the deal: the lender will typically send the loan funds directly to the seller or dealership. Once this is done, you can hit the road in your new car.
  • Start making payments: make repayments according to the terms of the loan agreement. Pay on time to avoid late fees or negative impact on your credit score.

What are the pros and cons of car loan pre-approval?

Before applying for pre-approval, it’s important to weigh up the advantages and potential drawbacks:

Pros:

  • Shop with confidence: knowing your pre-approved budget allows you to focus on cars that you can afford, and helps reduce stress and uncertainty.
  • Stronger negotiation power: when you tell a seller you're pre-approved for a specific amount, you instantly gain leverage. Having financing already secured shows you are a serious buyer and as a result some sellers might be more open to negotiating.
  • Faster loan process: once you find the perfect car, the final loan approval is often quicker because the lender already has most of your information on file.

Cons:

  • Conditional approval: pre-approval isn't a guaranteed loan. The final approval might involve verifying your information and checking the specific car (some lenders have restrictions on financed vehicles).
  • Multiple enquiries can affect credit score: applying for pre-approval with multiple lenders can lead to multiple inquiries on your credit report, which might slightly lower your credit score in the short term.
  • Time limit: pre-approvals typically have a validity window, often ranging from 30 to 90 days. Finding your car within that timeframe ensures you don't need to go through the pre-approval process again.

Is car loan pre-approval worth it?

Pre-approval can benefit a wide range of car shoppers, helping to empower them throughout the buying process. It may be especially useful for:

  • First-time buyers: pre-approval provides you with a clear understanding of your budget and financing options upfront, helping you make informed decisions.
  • Budget-conscious buyers: pre-approval helps you determine how much you can afford to borrow and set a realistic budget for their vehicle purchase. This helps ensure that you don't overspend or stretch yourself financially.
  • Buyers with credit concerns: pre-approval allows you to explore loan options from multiple lenders, helping you find a loan with favourable terms.
  • Proactive buyers: pre-approval is well-suited for buyers who prefer to plan ahead and have all their financial arrangements in place before making a purchase. It enables them to streamline the car buying process and avoid last-minute scrambling for financing.

Keep in mind that if you are a cash buyer, have a flexible budget or have already secured a car loan at a good rate from a bank or credit union, car loan pre-approval may not be necessary.

If you’re in the market for a new car, Savvy can help you secure the pre-approval and finance needed to make it happen. With more than a decade in the finance industry and thousands of satisfied customers, our expert team are willing and able to help you find the best car loans for your situation. Get started with us today!

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.

The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.

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