How does a car loan pre-approval work?
Know the benefits of car loan pre-approval and the process behind it.
Car loan pre-approval
Car loan pre-approval is the process of applying for a car loan in the usual way but stopping short of getting the money for the car until you find and intend to buy a car that suits your needs. The usual car loan approval process means applying for a loan, waiting for approval, and then handing over the money to a dealer or seller. In pre-approval, you are given a period in which you can find a car to buy. Once you’ve found a suitable car, you can then arrange the finance to be transferred to yourself or a dealer. Pre-approval sets a price ceiling on your loan, which you can then use to negotiate better prices with dealers or give assurance to private sellers that you have finance arranged in advance.
How to get car loan pre-approval
How car loan pre-approvals work in practice and the benefits of car loan pre-approval
Getting car loan pre-approval consists of the same process as car loan approval. Instead of applying after you’ve initiated a purchase, you apply well before you intend to purchase.
Before approaching lenders or brokers, you should know how much you can afford in repayments as well as running costs such as fuel, insurance, maintenance, and registration. This will give you a figure you can play with in a car loan calculator.
You should also get your credit history or credit score for a general idea on what kind of interest rate lenders might offer you. Higher credit scores mean lower interest rates and vice versa. This should give you a good budget to look at when approaching lenders.
Even though pre-approval doesn’t mean you need a car lined up straight away, you should consider your needs and wants and balance them against your budget. This can narrow down your picks and make the process easier for you.
A lender will then consider your application and offer an “in principle” agreement to fund your purchase when you make it. It’s then your responsibility to find a new car and call or contact the lender to initiate the funds transfer process. Some lenders may deposit the money direct into your bank account or to the dealer or seller. This can vary from lender to lender.
Spending limits and negotiation – your advantage
Car loan pre-approval gives you a price ceiling; this is the absolute limit of how much you can borrow. You need to keep this figure in mind when looking at cars; if you buy a car for over your pre-approval limit, you’ll have to fund it out of your own pocket.
Many banks and lenders issue a car loan pre-approval for a set period, usually 31 days. Some lenders will extend this pre-approval for you. Ask your lender or your broker to find out if there are any fees associated with pre-approval extensions.
The advantage you gain is twofold. First, you don’t have to stress about securing finance once you’ve seen a car you like and want to buy. You only need activate the pre-approval by calling your broker or lender to have funds transferred where necessary.
Second, it’s your “bargaining chip” in negotiation. If you approach a seller with a price ceiling of $20,000, the dealer will have to show you cars below that price or match your price ceiling. If you are looking for a new car that has a list price of $25,000, the dealer will have to match or better your price ceiling. That means they’ll have to come down to $20,000 – or even lower – or you will have to find an alternative.
Related to negotiation, pre-approval also gives any private sellers confidence you can pay for the car during your research and buying process. Showing a private seller that you have car loan pre-approval may increase the chances of selling to you (remember; they’re under no obligation to sell to you if they don’t want to) and even come down on the price to match your pre-approval amount. A pre-approval is as good as “cash in the hand” – there’s no guessing or uncertainty around whether you can come up with the money to pay or not.
It also stops you from overspending – if you buy something above your price ceiling, you’ll have to pay for it out of your own pocket.
Zero percent finance arrangements are designed to maximise dealer profits. Such deals may force you to purchase the vehicle at the list price which means you cannot negotiate a better deal with your dealer. These are also offered at a base interest rate, not a comparison rate.
The loan terms may be longer or shorter than consumer car loans (they are usually over three to four years in most cases); they may include balloon payments; they usually attract high fees and charges to recoup the revenue a dealer finance company would normally get through interest. They may also need an upfront deposit and a good or excellent credit score for you to be eligible.
How car loan pre-approval works?
Get your budget sorted
How much can you afford in repayments each month? What is your current income and expenditure?
Have a clear understanding of your borrowing power
Knowing how much you can afford to repay per month over a set period (usually five years) shows how much you can borrow to put toward a car.
Approach lenders and ask for pre-approval products
With your documents and other items in order, approach lenders and see if they offer pre-approval.
Compare the products to see what’s best
Ask a broker who can save you time and money by comparing multiple lenders at the same time.
Get in-principle approval and start shopping
Once you’re pre-approved, you can start looking for a car within your budget.
Call or contact your lender when you’re ready
once you’ve found your car, contact your lender or broker to begin putting the loan in motion.
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