The Benefits of Auto Loan Preapproval
The following is a contributed post by LendingTree and does not reflect advice from Service Credit Union.
With the average price of a new car coming in at just under $50,000, few people can afford (or would want) to shell out that much cash upfront. Turning to auto financing is a common solution, but even that can be a challenge.
The average auto loan balance was nearly $24,000 in the last quarter of 2023, according to Experian data, a 5.2% increase from 2022 levels. Higher sales prices aren’t the only reason for the increase — higher loan interest rates and longer loan terms are two other key factors that drove up overall loan cost.
As a car shopper, it can feel like all the power is out of your hands, but this doesn’t need to be the case. Getting an auto loan preapproval can help you take back control of your budget and enhance your shopping experience.
What is auto loan preapproval?
Auto loan preapproval is an offer from a lender to give you a loan at the specified terms and interest rate.
Preapproval is a step above prequalification. With an auto loan prequalification, the lender does a quick review of your credit to determine your likelihood of qualifying for a loan if you apply. However, prequalification does not specify what those loan terms will be.
With preapproval, the lender takes a more in-depth look at your creditworthiness and offers you a loan quote with a specific interest rate. These terms may still be negotiable, and are subject to change based on your financials and vehicle collateral.
It’s also important to note that some lenders use the terms prequalification and preapproval interchangeably. You’ll know they’ve preapproved you if you see the specific loan terms with the offer.
Getting preapproval for an auto loan can give you a big leg-up in the car-buying process. Here are some of the top benefits:
You can set a more realistic budget
Getting preapproved for an auto loan means you know ahead of time how much and what loan terms you can get through the lender. This can make it much easier to budget by letting you calculate your monthly loan payment based on the terms and interest rate. You’ll also know ahead of time how much money you have to work with when car shopping.
You have better negotiating power
Having a preapproval letter in hand when you visit car dealerships can give you the the confidence to know how much you can afford to purchase along with how much you can afford on backend items, such as a warranty. You can use the terms of your preapproval letter as a price cap to streamline your shopping experience and what inventory you are exploring.
You can comparison shop
A key tenet to getting the best rates is knowing what the best rates are. Preapproval can help you do this by letting you shop at various lenders and lending platforms to compare rates. And don’t worry, you don’t have to accept a preapproval offer if you get one.
Even if the dealer can’t finalize your loan in minutes, auto loan preapproval can turbo charge your car-buying experience. It shows dealers that you’re a serious buyer, which can help them prioritize you over more casual shoppers.
Ready to get started? Apply for a car loan now.
