Car loan pre-approval is an “in principle” approval from a lender that allows you to borrow a set amount of money before purchasing a vehicle. The money is not lent to you immediately; you must purchase a car for the transfer to occur. In effect, your loan is kept on “standby” until you find the car that suits your needs. Car loan pre-approval also gives you a “price ceiling” that can help you with negotiating better prices.
Buying cars from a private seller can often be a good way to save money. Private sales means cars may be in relatively good condition despite their age and are cheaper as the seller does not have to charge a premium for commissions and overheads. Lenders often give would-be buyers car loan pre-approval for private sales and even auction sales.
This gives you more bargaining power with potential sellers which we explain in detail below.
Car loan pre-approval works in much the same way as any type of personal finance approval. A prospective buyer will have to approach a lender or broker and apply for finance. The buyer will need to consent to credit checks, supply employment or financial information, and other documentation to verify their identity.
The crucial difference is that you are not given the money immediately – you are given conditional approval or “pre-approval” for a short amount of time – weeks or up to a month or so.
Lender pre-approval is not as common as standard car loans and may not be available for bad credit customers.
Using an accredited and qualified broker can help you find lenders who offer pre-approvals on car loans with competitive rates.
Car pre-approval gives you a set amount a lender will allow you to borrow to buy a car. This is your “price ceiling” – if your car costs more than the list price or negotiated price, this will have to come out of your own pocket.
This gives you a leg up on negotiation by setting a hard and fast limit on what you may spend on a car. Approaching dealers with a $50,000 limit means they will have to sell you a car at $50,000 or you will have to walk away.
One tip is to approach dealers at the end of the month while looking at showroom cars. These cars may not be customisable, but the added advantage to you is the dealer has already bought the cars and are now costing the dealer money to keep around. Salespeople have quotas or sales targets to make and may be more open to dealing at the end of the month to enhance their month-end stats.
Likewise, private sellers may be more open to taking less as they need the money to fund their next car purchase. The longer they keep their existing car means the further away their next car is.
Private sellers may be more open to dealing with someone with pre-approval as they can feel confident the buyer is committed to making a deal and has the funds to complete the transaction.
If you can, try to negotiate added “sweeteners”; dealers may offer to absorb the costs of stamp duty, registration, or other on-road costs to make the sale.
Before applying for a pre-approval car loan, you should have already done your homework when it comes to the type of car you are looking for. You should have narrowed down your choices to the type (SUV, sedan, hatch, etc.), make, model, and if applicable, year of manufacture. Before looking at cars in a showroom or online, you should already have a shortlist. This can help you avoid disappointment if your “dream” car is out of your price range or unavailable.
After pre-approval, you may have to temper your expectations. For example, your desired car may cost $55,000 but you have only been pre-approved for $45,000. While it’s possible to talk a dealer or private seller down to that price, you must be prepared for a “no.” Sometimes a “price floor” is as non-negotiable as a “price ceiling.”
You should test drive any vehicle you intend to purchase to find out if there are any obvious issues. If looking at privately sold cars, you may want to get an independent assessor to look at the car and/or look up the car’s VIN on the Personal Property Securities Register (PPSR) to avoid buying write-offs or stolen vehicles (though rare, it never hurts to look at the details.)